The Regulator's Trade-Off: Bank Supervision vs. Minimum Capital

The Regulator's Trade-Off: Bank Supervision vs. Minimum Capital

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.

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