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Level Playing Fields in International Financial Regulation

Authors

  • ALAN D. MORRISON,

  • LUCY WHITE

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    • Morrison is from Saïd Business School, University of Oxford and the Center for Economic Policy Research. White is from Harvard Business School and the Center for Economic Policy Research. We thank Philip Bond; Liam Brunt; Elena Carletti; Luc Laeven; Robert Marquez; Marcus Miller; and seminar participants at Stockholm School of Economics (SITE), the 2005 Oxford Finance Symposium, the World Bank Conference on Globalization and Financial Services in Emerging Economies (Washington, DC, 2005), ESSFM (Gerzensee, 2005), and the Universities of Amsterdam, Leicester, St. Gallen, Zurich, and Bristol for helpful comments. Morrison is grateful for financial support from the Oxford University Centre for Corporate Reputation. White gratefully acknowledges financial support from the NCCR FINRISK research project “Dynamic Corporate Finance and Financial Innovation.” Special thanks are due to Ken Okamura for numerous discussions on Japanese banking.


ABSTRACT

We analyze the desirability of level playing fields in international financial regulation. In general, level playing fields impose the standards of the weakest regulator upon the best-regulated economies. However, they may be desirable when capital is mobile because they counter a cherry-picking effect that lowers the size and efficiency of banks in weaker economies. Hence, while a laissez faire policy favors the better-regulated economy, level playing fields are good for weaker regulators. We show that multinational banking mitigates the cherry-picking effect, and reduces the damage that a level playing field causes in the better-regulated economy.

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