Level Playing Fields in International Financial Regulation

42 Pages Posted: 27 Oct 2005

See all articles by Alan D. Morrison

Alan D. Morrison

University of Oxford - Said Business School; University of Oxford - Merton College

Lucy White

Centre for Economic Policy Research (CEPR); Boston University - Department of Finance & Economics

Date Written: September 2005

Abstract

We model the interaction between two economies where banks exhibit both adverse selection and moral hazard and bank regulators try to resolve these problems. We find that liberalizing bank capital flows between economies reduces total welfare by reducing the average size and efficiency of the banking sector. This effect can be countered by adopting a 'level playing field' forcing international harmonization of capital requirements and deposit rates across economies. Such a policy is good for weaker regulators whereas a laissez-faire policy under which each country chooses its own capital requirement is better for the higher quality regulator. We find that imposing a level playing field among countries is globally optimal provided regulators' abilities are not too different, and comment on how shocks will be transmitted differently across the two policy regimes. We extend the model to allow for multinational banks, licensed by both regulators, showing that the same considerations arise in this context. Allowing multinationals improves welfare when bank capital can flow across borders, despite the negative impact on local banks.

Keywords: Bank regulation, capital, multinational banks, international financial regulation, level playing field

JEL Classification: F36, G21, G28

Suggested Citation

Morrison, Alan and White, Lucy, Level Playing Fields in International Financial Regulation (September 2005). CEPR Discussion Paper No. 5247, Available at SSRN: https://ssrn.com/abstract=837264

Alan Morrison

University of Oxford - Said Business School ( email )

Department of Finance
Park End Street
Oxford OX1 1HP
United Kingdom
+44 18 6527 6343 (Phone)
+44 18 6527 6310 (Fax)

University of Oxford - Merton College

Merton Street
Oxford OX1 4JD
United Kingdom
+44 18 6527 6343 (Phone)

Lucy White (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States