TY  - JOUR
AU  - Sinn,Hans-Werner
TI  - Risk Taking, Limited Liability and the Competition of Bank Regulators
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8669
PY  - 2001
Y2  - December 2001
UR  - http://www.nber.org/papers/w8669
L1  - http://www.nber.org/papers/w8669.pdf
N1  - Author contact info:
Hans-Werner Sinn
Ifo Institute -
Leibniz Institute for Economic Research
at University of Munich
Poschingerstr. 5
81679 Munich
GERMANY
Tel: 49-89-21802748
Fax: 49-89-397303;49-89-8506434 (home)
E-Mail: sinn@ifo.de
AB  - Limited liability and asymmetric information between an investment bank and its lenders  provide an incentive for a bank to undercapitalise and finance overly risky business projects. To counter this market failure, national governments have imposed solvency constraints on banks. However, these constraints may not survive in systems competition, as systems competition is likely to suffer from the same type of information asymmetry which induced the private market failure and which brought in the government in the first place (Selection Principle). As national solvency regulation creates a positive international policy externality on foreign lenders of domestic banks, there will be an undersupply of such regulation. This may explain why Asian banks were undercapitalised and took excessive risks before the banking crisis emerged.
ER  -