Stavrakeva, V (2020) Optimal Bank Regulation and Fiscal Capacity. Review of Economic Studies, 87 (2). pp. 1034-1089. ISSN 0034-6527
Abstract
Financial regulation is harmonized across countries even though countries vary in their ability to bail-out their banking sector in the event of a crisis. This paper addresses the question of whether countries with different fiscal capacity should optimally have different bank regulation, implemented — among other tools — through capital requirements — a question so far ignored by the theoretical banking literature. I show that countries with larger fiscal capacity should have lower ex-ante minimum bank capital requirements, in an environment with endogenously incomplete markets and overinvestment due to “Too-Big-To-Fail” moral hazard and pecuniary externalities. I also show that, in addition to a minimum bank capital requirement, regulators in countries with strong “Too-Big-To-Fail” moral hazard should impose a limit on the liabilities pledged by financial institutions in a crisis state. This implies limits on put options/CDS contracts. Finally, I argue that the type of regulatory instrument used is crucial as to whether larger fiscal capacity implies more or less stringent bank regulation.
More Details
Item Type: | Article |
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Subject Areas: | Economics |
Additional Information: |
© 2019 Oxford University Press & © 2019 The Review of Economic Studies Limited. This is a pre-copyedited, author-produced version of an article accepted for publication in he Review of Economic Studies following peer review. The version of record: Vania Stavrakeva, Optimal Bank Regulation and Fiscal Capacity, The Review of Economic Studies, , rdz012, https://doi.org/10.1093/restud/rdz012 is available online at: https://academic.oup.com/restud/article/doi/10.1093/restud/rdz012/5370184/ and at: https://doi.org/10.1093/restud/rdz012> |
Date Deposited: | 12 Apr 2019 12:37 |
Date of first compliant deposit: | 12 Apr 2019 |
Subjects: |
Commercial banks Government economic controls and regulations |
Last Modified: | 21 Nov 2024 02:59 |
URI: | https://lbsresearch.london.edu/id/eprint/1117 |