DP12791 | Regulatory Competition in Banking: A General Equilibrium Approach

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We study competition between governments with regard to capital requirements, bank levies and resolution regimes in a general equilibrium setting. In a two-country model, households can invest both domestically and abroad, with banks acting as intermediaries between households and risky technologies. When competing governments set banking regulation, the mechanism at work is driven by the trade-off between accentuating benefits over costs stemming from banking activities, on the one hand, and enhancing banks' competitiveness, on the other hand. Whether or not regulatory competition yields the efficient allocation of resources and risks crucially depends on whether governments compete with one, two or three policy tools.