Liberalization, Prudential Supervision, and Capital Requirements : The Policy Trade-Offs

Author/Editor:

Elina Ribakova

Publication Date:

July 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

While deregulated financial markets and strong competition are commonly viewed as prerequisites for successful economic development, recent empirical evidence suggests that financial liberalization, if not well phased, can lead to costly financial crises. This paper focuses on the roles of minimum capital requirements and prudential supervision in promoting financial stability during financial liberalization. The paper extends the Hellmann, Murdock, and Stiglitz model to analyze the effects of prudential supervision and demonstrates the trade-off between the quality of supervision and the level of minimum capital requirements. Where prudential supervision is poor, higher capital requirements are optimal.

Series:

Working Paper No. 05/136

Subject:

English

Publication Date:

July 1, 2005

ISBN/ISSN:

9781451861556/1018-5941

Stock No:

WPIEA2005136

Format:

Paper

Pages:

14

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