Bank capital regulation: a role for a supranational regulator?

Abstract : Using a simple two-country model where national or supranational regulators can set capital requirements as either risk sensitive capital or leverage ratios, we examine which of these arrangements is best. Our results demonstrate the importance of capital requirements being set at a supranational level particularly when cross-country spillovers are large and national regulators su¤er from substantial degrees of regulatory capture. We further highlight the im-portance of llowing for supervisory "remoteness" in this context, and show that national regulators may want to surrender regulatory power only when spillover e¤ects are large but the degree of supervisory capture is relatively small.