Liberalization, Prudential Supervision, and Capital Requirements: The Policy Trade-Offs

15 Pages Posted: 3 Mar 2006

See all articles by Elina Ribakova

Elina Ribakova

International Monetary Fund (IMF)

Date Written: July 2005

Abstract

While deregulated financial markets and strong competition are commonly viewed as prerequisites for successful economic development, recent empirical evidence suggests that financial liberalization, if not well phased, can lead to costly financial crises. This paper focuses on the roles of minimum capital requirements and prudential supervision in promoting financial stability during financial liberalization. The paper extends the Hellmann, Murdock, and Stiglitz model to analyze the effects of prudential supervision and demonstrates the trade-off between the quality of supervision and the level of minimum capital requirements. Where prudential supervision is poor, higher capital requirements are optimal.

Keywords: Moral hazard, prudential supervision, liberalization, banking competition, capital requirements, franchise value

JEL Classification: G2, G3, L5

Suggested Citation

Ribakova, Elina, Liberalization, Prudential Supervision, and Capital Requirements: The Policy Trade-Offs (July 2005). IMF Working Paper No. 05/136, Available at SSRN: https://ssrn.com/abstract=888005

Elina Ribakova (Contact Author)

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
138
Abstract Views
845
rank
292,956
PlumX Metrics