Article thumbnail

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.Capital regulation; risk-taking of banks; local generalized method of moments

OAI identifier:

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

Suggested articles

Citations

  1. (2007). A local generalized method of moments estimator.
  2. (1990). A re-examination of the mean-variance analysis of bank capital regulation.
  3. (1978). Bank capital adequacy, deposit insurance and security values.
  4. (1999). Bank capital and equity investment regulations.
  5. (2001). Bank capital regulation in contemporary banking theory: A review of the literature.
  6. (2009). Bank governance, regulation, and risk taking.
  7. (2005). Bank regulation and risk-taking incentives: An international comparison of bank risk.
  8. (2004). Bank regulation and supervision: What works best?
  9. (1992). Bank regulation under nonbinding capital guidelines.
  10. (2006). Bank risk-taking and competition revisited: New theory and new evidence. IMF Working Paper 06/297.
  11. (1983). Bank runs, deposit insurance, and liquidity.
  12. (2008). Banking on the principles: Compliance with Basel Core Principles and bank soundness.
  13. (1977). Capital adequacy and the regulation of financial intermediaries.
  14. (1989). Capital regulation and bank risk-taking: A Note.
  15. (2006). Capital regulation, heterogeneous monitoring costs, and aggregate loan quality.
  16. (2008). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Bank for International Settlements Working Paper 268,
  17. (2001). Capital, portfolio, and growth: Bank behavior under risk-based capital guidelines.
  18. (2003). Comment on “What drives bank competition? Some international evidence” by Stijn Claessens and Luc Laeven.
  19. (1978). Deposit insurance and bank regulation: A partial-equilibrium exposition.
  20. (1990). Deposit insurance, risk, and market power in banking.
  21. (1999). Do capital adequacy requirements reduce risks in banking?
  22. (2002). Dynamic panel data models: A guide to micro data methods and practice. Centre for Microdata Methods and Practice Working Paper 09. The Institute for Fiscal Studies, Department of Economics,
  23. (2008). Exploring the nexus between banking sector reform and performance: Evidence from OECD countries.
  24. (1998). Initial conditions and moment restrictions in dynamic panel data models,
  25. (2006). Introduction: Accounting, transparency and banking stability.
  26. (2009). Local GMM estimation of semiparametric dynamic panel data with smooth coefficient models. Econometric Reviews,
  27. (1999). Local Regression and Likelihood.
  28. (2008). Microeconomics of Banking.
  29. (2007). Nonparametric stochastic frontiers: A local maximum likelihood approach.
  30. (2007). On the determinants of local government performance: A two-stage nonparametric approach.
  31. (1980). Regulation of bank capital and portfolio risk.
  32. (2009). Regulations, competition and bank risk-taking in transition countries.
  33. (1988). Risk in banking and capital regulation.
  34. (1987). Testing for ‘monopoly’ equilibrium.
  35. (2008). The
  36. (2008). The economic consequences of legal origins.
  37. (2006). The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis.
  38. (2009). The joint estimation of bank-level market power and efficiency.
  39. (2001). The regulation and supervision of bank around the world: a new database, In: Litan
  40. (2007). Theories of bank behaviour under capital regulation.
  41. (2000). Variable bandwidth selection in varying-coefficient models.