Government regulation and international competition in the financial sector

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This project aims to contribute to a closer integration of important issues in financial economics into the public economics literature. For this purpose, we analyze the effects of regulatory and tax policies in the financial sector in a general equilibrium setting that is typical for existing research in public economics and international trade, but that is still very rare in the financial economics literature. At the same time, we incorporate important elements from financial economics which have so far been largely neglected in the public finance literature. This concerns, in particular, the endogenous risk-taking decisions of banks and the implicit or explicit subsidization of these risks through government policies and hence taxpayers. A further important element is the international integration of capital and financial services markets, which expose national financial sectors, but also national regulatory and tax policies, to the forces of international competition. In such a framework we analyze the effects of national bank levies, capital requirements and bailout policies on different economic agents (banks, producers, consumers, taxpayers) and national welfare. We also raise issues of policy coordination. The project consists of four specific research areas, which aim to derive testable hypotheses on the effects of regulatory and tax policies for international competition in the banking sector.