Coordination Incentives in Cross-Border Macroprudential Regulation

Alexis Derviz^1,2*, Jakub Seidler³

¹Monetary and Statistics Department, Czech National Bank, Prague, Czech Republic.
²Institute of Information Theory and Automation, Prague, Czech Republic.
³Institute of Economic Studies, Charles University, Prague, Czech Republic.

DOI: 10.4236/me.2014.511098                

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.

Keywords

Macroprudential Regulation, Integration, Autonomy, Information, Reporting

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	Goldstein, M. (2003) An Evaluation of Proposals to Reform the International Financial Architecture. NBER Chapters, In: Dooley, M.P. and Frankel, J.A., Eds., Managing Currency Crises in Emerging Markets, National Bureau of Economic Research, Cambridge, 225-272. http://dx.doi.org/10.7208/chicago/9780226155425.003.0015
[2]	Eatwell, J. and Taylor, L. (1998) International Capital Markets and the Future of Economic Policy. CEPA Working Paper Series, WP No. 9, New School for Social Research, NYC.
[3]	Eichengreen, B. (2010) Out-Of-the-Box Thoughts about the International Financial Architecture. Journal of International Commerce, Economics and Policy, 1, 1-20.
[4]	Pistor, K. (2010) Host’s Dilemma: Rethinking EU Banking Regulation in the Light of the Global Crisis. Columbia Law and Economics Working Paper No. 378, Columbia University, NYC.
[5]	Cerutti, E., Ilyina, A., Makarova,Y. and Schmieder, C. (2010) Banks without Borders? Implications of Ring-Fencing for European Cross-Border Banks. IMF Working Paper 10/247 (November), IMF, Washington, D.C.
[6]	Angelini, P., Neri, S. and Panetta, F. (2012) Monetary and Macroprudential Policies. Working Paper Series 1449, European Central Bank, Frankfurt.
[7]	de Walque, G., Pierrard, O. and Rouabah, A. (2010) Financial (In)stability, Supervision and Liquidity Injections: A Dynamic General Equilibrium Approach. Economic Journal, 120, 1234-1261. http://dx.doi.org/10.1111/j.1468-0297.2010.02383.x
[8]	Covas, F. and Fujita, S. (2010) Procyclicality of Capital Requirements in a General Equilibrium Model of Liquidity Dependence. International Journal of Central Banking, 6, 137-173.
[9]	Wilson, J.D. (1999) Theories of Tax Competition. National Tax Journal, 52, 269-304.
[10]	Dixit, A. (2001) Games of Monetary and Fiscal Interactions in the EMU. European Economic Review, 45, 589-613. http://dx.doi.org/10.1016/S0014-2921(01)00105-2
[11]	Kahn, C. and Santos, J. (2001) Allocating Bank Regulatory Powers: Lender of Last Resort, Deposit Insurance and Supervision. BIS Working Paper 102, Bank for International Settlements, Basel.
[12]	Gaspar, V. and Schinasi, G. (2010) Financial Stability and Policy Cooperation. Working Paper 0201001, Banco de Portugal, Economics and Research Department, Lisbon.
[13]	Seabright, P. (1996) Accountability and Decentralisation in Government: An Incomplete Contracts Model. European Economic Review, 40, 61-89. http://dx.doi.org/10.1016/0014-2921(95)00055-0
[14]	Williamson, O.E. (1967) Hierarchical Control and Optimum Firm Size. Journal of Political Economy, 75, 123-138. http://dx.doi.org/10.1086/259258
[15]	Dasgupta, P., Hammond, P. and Maskin, E. (1979) The Implementation of Social Choice Rules: Some General Results on Incentive Compatibility. Review of Economic Studies, 46, 185-216. http://dx.doi.org/10.2307/2297045
[16]	Sinn, H.W. and Wollmershäuser, T. (2011) Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility. NBER Working Paper 17626, National Bureau of Economic Research, Cambridge.
[17]	Farrell, J. and Rabin, M. (1996) Cheap Talk. Journal of Economic Perspectives, 10, 103-118. http://dx.doi.org/10.1257/jep.10.3.103
[18]	Hellas, J. and Liu, M. (1996) Repeated Games with Partial Monitoring: The Stochastic Signaling Case. Game Theory and Information 9605001, EconWPA, Washington University, St. Louis.
[19]	Feldman, D. (2004) Separating Signaling Equilibria under Random Relations between Costs and Attributes: Discrete Attributes. Mathematical Social Sciences, 48, 93-101. http://dx.doi.org/10.1016/j.mathsocsci.2003.12.002
[20]	Feldman, D. and Winer, R.S. (2004) Separating Signaling Equilibria under Random Relations between Costs and Attributes: Continuum of Attributes. Mathematical Social Sciences, 48, 81-91. http://dx.doi.org/10.1016/j.mathsocsci.2003.12.004
[21]	Crawford, V. and Sobel, J. (1982) Strategic Information Transmission. Econometrica, 50, 1431-1451. http://dx.doi.org/10.2307/1913390
[22]	Stein, J. (1989) Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements. American Economic Review, 79, 32-42.
[23]	Townsend, R.M. (1983) Forecasting the Forecasts of Others. Journal of Political Economy, 91, 546-588. http://dx.doi.org/10.1086/261166