International Prudential Regulation, Regulatory Risk and Cost of Bank Capital

We define regulatory risk as regulation that leads to an increase in the cost of capital for a regulated firm. In a general equilibrium setting, scholars have shown that uniform increases in capital requirements lead to an increase in the cost of capital. We extend their model to show that when regu...

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Bibliographic Details
Published inInternational Journal of Banking and Finance Vol. 5; no. 1; p. 27
Main Author Ngo, Phong T. H.
Format Journal Article
LanguageEnglish
Malay
Published Kedah Universiti Utara Malaysia 01.04.2008
Subjects
bank capital regulation
Basel Accord
cost of capital
international harmonization
Regulation
regulatory risk
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Summary:We define regulatory risk as regulation that leads to an increase in the cost of capital for a regulated firm. In a general equilibrium setting, scholars have shown that uniform increases in capital requirements lead to an increase in the cost of capital. We extend their model to show that when regulatory standards differ across countries, financial integration leads to positive spillovers that reduce the cost of capital mark up for a given increase in bank capital. Accordingly, regulatory risk may be greater under a regulatory agreement such as the Basel Accord, which imposes international uniformity in capital ratios.  
ISSN:1675-722X
2811-3799
2590-423X
1675-722X
DOI:10.32890/ijbf2008.5.1.8358