Modern Economy
Volume 5, Issue 11 (October 2014)
ISSN Print: 2152-7245 ISSN Online: 2152-7261
Google-based Impact Factor: 0.74 Citations h5-index & Ranking
Coordination Incentives in Cross-Border Macroprudential Regulation ()
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ABSTRACT
When national financial sector regulators need to mutually harmonize macroprudential policy decisions, imperfections of cross-border information exchange may undermine fair cooperation. Attempts to overcome the effects of informational distortions by delegating macroprudential policy to a supranational body are also likely to entail welfare losses. We study the tradeoff between macroprudential policy autonomy and centralization by means of a signaling game of imperfect information played by two national regulators. The model concentrates on informational frictions in an environment with otherwise fully aligned preferences. We show that even in the absence of evident conflicting goals, the non-transferable nature of some regulatory information creates misreporting incentives. Reporting accuracy is a part of a broader problem of strategic advantage-seeking by the national regulators. Therefore, cross-border coordination mechanisms, centralized or not, that limit strategic behavior are preferable to those allowing its full deployment. The results are applicable to systemic risk management by international organizations, including the relevant EU institutions.
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