Liberalization, Prudential Supervision, and Capital Requirements: The Policy Trade-Offs
IMF Working Papers, July 1, 2005
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- Liberalization, Prudential Supervision, and Capital Requirements: The Policy Trade-Offs
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Bibliographic details
- Authors: Elina Ribakova
- Published: July 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861556.001
Key findings and analytical focus
- Focuses on the roles of minimum capital requirements and prudential supervision in promoting financial stability during financial liberalization.
- Extends the Hellmann, Murdock, and Stiglitz model to analyze the effects of prudential supervision.
- Demonstrates a trade-off between the quality of supervision and the level of minimum capital requirements.
- Core conclusion: Where prudential supervision is poor, higher capital requirements are optimal.
- Highlights that financial liberalization, if not well phased, can lead to costly financial crises.
Policy implications and recommendations
- Strengthen prudential supervision to allow lower minimum capital requirements while maintaining financial stability.
- In environments with weak supervision, implement higher minimum capital requirements to mitigate crisis risk.
- Consider phasing of financial liberalization carefully to avoid destabilizing effects if supervisory capacity is limited.
Subjects and keywords (as presented)
- Subject: Banking, Capital adequacy requirements, Competition, Deposit rates, Financial crises
- Keywords: bank, deposit rate, gambling bank, WP