Citation

Discussion Paper Details

Please find the details for DP3253 in an easy to copy and paste format below:

Full Details

Title: Is the International Convergence of Capital Adequacy Regulation Desirable?

Author(s): Viral V. Acharya

Publication Date: March 2002

Keyword(s): bank regulation, capital adequacy, closure policy, financial integration, international spillovers and risk-shifting

Programme Area(s): Financial Economics

Abstract: The merit of having international convergence of bank capital requirements in the presence of divergent closure policies of different central banks is examined. While the privately optimal level of bank capital decreases with regulatory forbearance (they are strategic substitutes), the socially optimal level of bank capital increases with regulatory forbearance (they are strategic complements). Hence, in optimal regulatory design, the level of minimum bank capital requirement increases with the forbearance in central bank closure policy. The lack of such linkage leads to a spillover from more forbearing to less forbearing economies and reduces the competitive advantage of banks in less forbearing economies. Linking the central bank?s forbearance to its alignment with domestic bankowners, it is shown that in equilibrium a regression towards the worst closure policy may result: the central banks of initially less forbearing economies have to adopt greater forbearance as well.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3253

Bibliographic Reference

Acharya, V. 2002. 'Is the International Convergence of Capital Adequacy Regulation Desirable?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3253