The regulator's trade-off: Bank supervision vs. minimum capital

Florian Buck, Eva Schliephake*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)


We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and the supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks' profitability, whereas strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that a mix of both instruments minimises the costs of preventing the collapse of financial intermediation. Once we allow for cross-border banking, the optimal policy is not feasible. If domestic supervisory effort is not observable, our model predicts a race to the bottom in capital requirement regulation. Therefore, countries are better off by harmonising regulation on an international standard.
Original languageEnglish
Pages (from-to)4584-4598
Number of pages15
JournalJournal of Banking and Finance
Issue number11
Publication statusPublished - Nov 2013
Externally publishedYes


  • Bank regulation
  • Banking supervision
  • Regulatory competition


Dive into the research topics of 'The regulator's trade-off: Bank supervision vs. minimum capital'. Together they form a unique fingerprint.

Cite this