Bank capital regulation: Are local or central regulators better?

• Published in: Journal of international financial markets, institutions & money institutions & money, 2017-07, Vol.49, p.103-114
• Main Authors: Haritchabalet, Carole, Lepetit, Laetitia, Spinassou, Kévin, Strobel, Frank
• Format: Article
• Language: English
• Subjects: Bank regulation; Capital requirement; Economics and Finance; Financial architecture; Humanities and Social Sciences; Regulatory capture; Spillover
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2017.02.007

•Examine welfare impact of local vs central setting of bank capital requirements.•Central best with strong local regulatory capture & large cross-region spillovers.•Explore when local regulators want to surrender regulatory power to central ones.•Also examine impact of systemic risk & asymmetry in local regulatory capture. Using a simple two-region model where local or central regulators set bank capital requirements as risk sensitive capital or leverage ratios, we demonstrate the importance of capital requirements being set centrally when cross-region spillovers are large and local regulators suffer from substantial regulatory capture. We show that local regulators may want to surrender regulatory power only when spillover effects are large but the degree of supervisory capture is relatively small, and that bank capital regulation at central rather than local levels is more beneficial the larger the impact of systemic risk and the more asymmetric is regulatory capture at the local level.