Bank regulation and systemic risk: cross country evidence
- PDF / 877,315 Bytes
- 35 Pages / 439.37 x 666.142 pts Page_size
- 39 Downloads / 194 Views
Bank regulation and systemic risk: cross country evidence Lei Chen1 · Hui Li2 · Frank Hong Liu3 · Yue Zhou4 Accepted: 19 November 2020 © The Author(s) 2020
Abstract Using data for banks from 65 countries for the period 2001–2013, we investigate the impact of bank regulation and supervision on individual banks’ systemic risk. Our cross-country empirical findings show that bank activity restriction, initial capital stringency and prompt corrective action are all positively related to systemic risk, measured by Marginal Expected Shortfall. We use the staggered timing of the implementation of Basel II regulation across countries as an exogenous event and use latitude for instrumental variable analysis to alleviate the endogeneity concern. Our results also hold for various robustness tests. We further find that the level of equity banks can alleviate such effect, while bank size is likely to enhance the effect, supporting our conjecture that the impact of bank regulation and supervision on systemic risk is through bank’s capital shortfall. Our results do not argue against bank regulation, but rather focus on the design and implementation of regulation. Keywords Bank regulation and supervision · Systemic risk · Activity restrictions · Capital shortfall JEL Classification G21 · G28 · G01
* Lei Chen [email protected] Hui Li [email protected] Frank Hong Liu [email protected] Yue Zhou [email protected] 1
Management School, University of Sheffield, Sheffield, UK
2
The Department of Finance, University of Birmingham, Birmingham, UK
3
The School of Business and Economics, Loughborough University, Loughborough, UK
4
Southampton Business School, University of Southampton, Southampton, UK
13
Vol.:(0123456789)
L. Chen et al.
1 Introduction The inappropriate regulations and ineffective monitoring and supervision by official agencies have been regarded as a critical cause of the global financial crisis of 2007–2009 (Goodhart 2008; Schwarcz 2008; Acharya 2009; Laeven and Levine 2009). For example, Acharya (2009) argue that Basel regulations require banks to hold a certain ratio of capital to reduce individual banks’ liquidity risk but overlook the correlated risk banks take which can lead to joint failures. Despite the increasing calls for renewed focus on systemic stability and macro-prudential regulation (e.g. Acharya et al. 2012), our understanding of how bank regulation and supervision affect systemic stability tends to be very limited (Arnold et al. 2012; Barth et al. 2013b). A few studies have examined the impact of bank regulation and/or supervision on systemic stability (e.g., Anginer et al. 2018; Barth et al. 2004; Demirgüç-Kunt and Detragiache 2002, 2011). Based on bank regulation data from the World Bank Survey, Barth et al. (2004) find that banks operating in countries with higher regulatory restriction are more likely to experience a banking crisis. Demirgüç-Kunt and Detragiache (2011), on the other hand, fail to find relationship between the adherence to the Basel core principles
Data Loading...
