Bank capital regulation: are local or central regulators better?

Using a simple two-region model where local or central regulators set capital requirements as risk sensitive capital or leverage ratios, we demonstrate the importance of capital requirements being set centrally when cross-region spillovers are arge and local regulators suffer from substantial regulatory capture. We show that local regulators may want to surrender regulatory power only when spillover effects are large but the degree of supervisory capture is relatively small, and that capital regulation at central rather than local levels is more benefcial the larger the impact of systemic risk and the more asymmetric is regulatory capture at the local level.