Essays on International Financial Regulation

Kara, Gazi Ishak

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March 22, 2019

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Kara, Gazi Ishak
- Affiliation: College of Arts and Sciences, Department of Economics

Abstract

The first chapter of this dissertation examines the incentives of national regulators to coordinate regulatory policies in the presence of systemic risk in global financial markets. In a two-country and three-period model, correlated asset fire sales by banks generate systemic risk across national financial markets. Relaxing regulatory standards in one country increases both the cost and the severity of crises for both countries in this framework. In the absence of coordination independent regulators choose inefficiently low level of macro-prudential regulation. A central regulator internalizes the systemic risk and thereby can improve the welfare of coordinating countries. Symmetric countries always benefit from coordination. Asymmetric countries choose different levels of macro-prudential regulation when they act independently. Common central regulation will voluntarily emerge only between sufficiently similar countries. The second chapter investigates the empirical determinants of cross country and over time variation in the stringency of bank capital regulations. Despite the extensive attention that the Basel capital adequacy standards received internationally, there exists significant variation in the implementation of these standards across countries. Furthermore, a significant number of countries increase or decrease the stringency of capital regulations over time. The chapter investigates the empirical determinants of the variation that is seen in the data based on the theories of bank capital regulation. The results provide strong evidence that countries with high average returns to investment choose less stringent capital regulation standards. There is also some evidence that capital regulations are less stringent in countries with higher ratio of government ownership of banks where government ownership is used as a proxy for the regulatory capture: the degree to which regulators are captured by the financial institutions under their control. The results provide somewhat weaker evidence that countries with more concentrated banking sectors impose less strict capital regulation standards.

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