Staff Working Paper No. 1,098
By Carlos Cañón Salazar, Misa Tanaka and John Thanassoulis
We develop a game-theoretic model in which financial regulators compete to attract internationally mobile banks by setting the level of regulatory stringency to meet both financial stability and growth objectives. We show that competitive deregulation will not arise if the relatively growth-focused regulator becomes even more growth focused, but it becomes more likely if the relatively stability-focused regulator becomes more growth focused. We also demonstrate that domestic nonregulatory inducements to retain banks (eg tax, labour laws) create an externality on the global equilibrium of regulatory stringency chosen by financial regulators with a growth objective.
Regulatory stringency as a competitive tool for financial centres
