Competition Among Regulators and Credit Market Integration

37 Pages Posted: 17 Feb 2005

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Robert Marquez

University of California, Davis

Abstract

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

Dell'Ariccia, Giovanni and Marquez, Robert S., Competition Among Regulators and Credit Market Integration. Available at SSRN: https://ssrn.com/abstract=667901

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert S. Marquez (Contact Author)

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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