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

Florian Buck, Eva Schliephake

Research output: Working paper


We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks’ profitability, while strict supervision reduces the scope of intermediation and is costly for taxpayers. We show that the expected costs of a banking crisis are minimised with a mix of both instruments. 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 banking regulation. Therefore, countries are better off by harmonising regulation on an international standard.
Original languageEnglish
Number of pages28
Publication statusPublished - 10 Sept 2012
Externally publishedYes

Publication series

NameCESifo Working Paper Series


  • Bank regulation
  • Regulatory competition
  • Supervision and capital requirements


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