Competition Among Regulators and Credit Market Integration
37 Pages Posted: 17 Feb 2005
We analyze the incentives for independent domestic bank regulators to form a regulatory union when their jurisdictions are financially integrated. Because of externalities in bank regulation, competition among regulators reduces regulatory standards relative to the Pareto optimum, making the independent solution inefficient. Centralized regulation, however, entails a loss of flexibility if equal standards must be applied to all countries. In that context, we find that, first, a central regulator is more likely to emerge among more homogeneous countries. Second, a centralized regulator will be unanimously preferred to independence only if it sets regulatory standards higher than those of the country with the highest individual standards. Third, financial integration among more than two jurisdictions may prevent the formation of partial regulatory unions, which, in turn, may prevent the formation of more comprehensive agreements.
Keywords: Financial integration, regulation, credit markets
JEL Classification: G21, G28, F36
Suggested Citation: Suggested Citation
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By Daniel Hardy