Financial Liberalisation and Capital Regulation in Open Economies

Oxford Financial Research Centre Working Paper No. 2004-FE-10

27 Pages Posted: 5 May 2004  

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: April 2004

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 liberalising 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 forcing international harmonisation of capital requirements across economies, a policy reminiscent of the level playing field adopted in the 1988 Basle Accord. 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. We also show how shocks will be transmitted differently across the two policy regimes.

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

JEL Classification: F36, G21, G28

Suggested Citation

Morrison, Alan D. and White, Lucy, Financial Liberalisation and Capital Regulation in Open Economies (April 2004). Oxford Financial Research Centre Working Paper No. 2004-FE-10. Available at SSRN: https://ssrn.com/abstract=539983 or http://dx.doi.org/10.2139/ssrn.539983

Alan Morrison (Contact Author)

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

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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