The Cross-Border Effects of Bank Capital Regulation

52 Pages Posted: 14 May 2021

See all articles by Saleem Bahaj

Saleem Bahaj

UCL Economics

Frederic Malherbe

University College London - Department of Economics

Date Written: May 2021

Abstract

We propose a model for studying the international collaboration of bank capital regulation under the principle of reciprocity. We show that such a regime makes countries strategically compete for scarce bank equity capital. Raising capital requirements in a country may generate bank capital outflows as well as inflows. We pin down the condition for the sign of the capital flow and the associated externality, and highlight the implications for macroprudential regulation. Compared to full collaboration, individual countries are likely to set Basel III's Counter-Cyclical Capital Buffer too high in normal times, and too low in bad times.

Suggested Citation

Bahaj, Saleem and Malherbe, Frederic, The Cross-Border Effects of Bank Capital Regulation (May 2021). CEPR Discussion Paper No. DP16148, Available at SSRN: https://ssrn.com/abstract=3846263

Saleem Bahaj (Contact Author)

UCL Economics ( email )

30 Gordon Street
London, England WC1H 0AX
United Kingdom

Frederic Malherbe

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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