Skip to main content
Article thumbnail
Location of Repository

Quantifying and explaining parameter heterogeneity in the capital regulation-bank risk nexus

By Manthos D Delis, Kien Tran and Efthymios Tsionas

Abstract

By examining the impact of capital regulation on bank risk-taking using a local estimation technique, we are able to quantify the heterogeneous response of banks towards this type of regulation in banking sectors of western-type economies. Subsequently, using this information on the bank-level responses to capital regulation, we examine the sources of heterogeneity. The findings suggest that the impact of capital regulation on bank risk is very heterogeneous across banks and the sources of this heterogeneity can be traced into both bank and industry characteristics, as well as into the macroeconomic conditions. Therefore, the present analysis has important implications on the way bank regulation is conducted, as it suggests that common capital regulatory umbrellas may not be sufficient to promote financial stability. On the basis of our findings, we contend that Basel guidelines may have to be reoriented towards more flexible, country-specific policy proposals that focus on the restraint of excess risk-taking by banks.

Topics: C14 - Semiparametric and Nonparametric Methods: General, G38 - Government Policy and Regulation, G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series, G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Year: 2009
DOI identifier: 10.1016/j.jfs.2011.04.002
OAI identifier: oai:mpra.ub.uni-muenchen.de:18526

Suggested articles


To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.