Regulatory Arbitrage and the Efficiency of Banking Regulation

40 Pages Posted: 28 Apr 2016

See all articles by Pierre Boyer

Pierre Boyer

Ecole Polytechnique, Palaiseau - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS); National Research University Higher School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

Abstract

We study the efficiency of banking regulation under financial integration. Banks freely choose the jurisdiction where to locate their activities and have private information about their efficiency level. Regulators non-cooperatively offer any regulatory contract that satisfies information and participation constraints of banks. We show that the unique Nash equilibrium of the regulatory game is a simple pooling contract: financial integration is characterized by the inability for regulators to discriminate between banks with different efficiency levels. This result is driven by the endogenous restriction caused by regulatory arbitrage on the capacity of regulators to use several regulatory instruments.

Keywords: Regulatory Arbitrage; Banking regulation; Regulatory competition; Financial integration; Asymmetric information

JEL Classification: C72; D82; G21; G28

Suggested Citation

Boyer, Pierre C. and Kempf, Hubert, Regulatory Arbitrage and the Efficiency of Banking Regulation (April 2016). BAFFI CAREFIN Centre Research Paper No. 2016-18, Available at SSRN: https://ssrn.com/abstract=2770466 or http://dx.doi.org/10.2139/ssrn.2770466

Pierre C. Boyer (Contact Author)

Ecole Polytechnique, Palaiseau - Department of Economics ( email )

Route de Saclay
Palaiseau, 91120
France

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS) ( email )

61 avenue du président Wilson
Cachan, Paris 94235
France

National Research University Higher School of Economics

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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