Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital?
Reint E. Gropp, Thomas Mosk, Steven Ongena, Ines Simac, Carlo Wix
Journal of Financial and Quantitative Analysis,
im Erscheinen
Abstract
We study how banks use “regulatory adjustments” to inflate their regulatory capital ratios and whether this depends on forbearance on the part of national authorities. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that banks substantially inflated their levels of regulatory capital via a reduction in regulatory adjustments — without a commensurate increase in book equity and without a reduction in bank risk. We document substantial heterogeneity in regulatory capital inflation across countries, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.
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Short-Selling Threats and Bank Risk-Taking: Evidence from the Financial Crisis
Dien Giau Bui, Iftekhar Hasan, Chih-Yung Lin, Hong Thoa Nguyen
Journal of Banking and Finance,
May
2023
Abstract
The focus of this paper is whether the Securities and Exchange Commission's Regulation SHO strengthens or weakens the effect of short-selling threats on banks’ risk-taking. The evidence shows that pilot banks with looser constraints on short-selling increased their risk-taking during the financial crisis of 2007–2009. The reason is that short-selling threats improved the information environment and mitigated the agency problems of banks during the pilot program that led to greater risk-taking by pilot banks. Additionally, this effect is mainly driven by pilot banks with poor corporate governance, or high information asymmetry. Overall, our paper provides novel evidence that the disciplinary role of short-sellers had a positive effect on bank risk-taking during the financial crisis.
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Natural Disasters and Bank Stability: Evidence from the U.S. Financial System
Felix Noth, Ulrich Schüwer
Journal of Environmental Economics and Management,
May
2023
Abstract
We show that weather-related natural disasters in the United States significantly weaken the financial stability of banks with business activities in affected regions. This is reflected in higher probabilities of default, lower z-scores, higher non-performing assets ratios, higher foreclosure ratios, lower returns on assets and lower equity ratios of affected banks in the years following a natural disaster. The effects are economically relevant and highlight the financial vulnerability of banks and their borrowers despite insurances and public aid programs.
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Banking Reform, Risk-Taking, and Accounting Quality: Evidence from Post-Soviet Transition States
Yiwei Fang, Wassim Dbouk, Iftekhar Hasan, Lingxiang Li
Journal of International Accounting Research,
Nr. 1,
2022
Abstract
The drastic banking reform within Central and Eastern Europe following the collapse of the Soviet Union provides an ideal quasi-experimental design to examine the causal effects of institutional development on accounting quality (AQ). We find that banking reform spurs significant improvement in predictive power of earnings and reductions in earnings smoothing, earnings-inflating discretionary provisions, and avoidance of reporting losses. These effects hold under alternative model specifications and after considering concurrent institutional developments. In contrast, corporate reform shows no such effects, refuting the alternative explanation that unobserved factors affect both reform speed in general and the quality of financial reporting. We further identify four specific reformative actions that are integral to the drastic banking reform process where prudential regulation contributes the most to the observed AQ improvement. It supports the conjecture that banking reform improves AQ by reducing banks' risk-taking behaviors and, as a result, their motive behind accounting manipulation.
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Neue Basel-Regeln: Mehr Stabilität, weniger Kredite?
Reint E. Gropp
Wirtschaft im Wandel,
Nr. 4,
2021
Abstract
Ein Kernpunkt des geplanten Basel-III-Regelwerks sind die gestiegenen Eigenkapitalanforderungen. Umsetzungsprobleme könnten die gewünschten Effekte der Reformen jedoch konterkarieren. Zum einen könnten Banken ihre Eigenkapitalquote erhöhen, indem sie weniger Kredite an risikoreiche Kreditnehmer vergeben, statt ihr Eigenkapital
aufzustocken. Hiervon wären vor allem mittelständische Unternehmen ohne Kreditrating betroffen. Zum anderen lassen auch die neuen, strengeren Regeln den nationalen Bankenaufsehern Bewertungsspielräume, die von den Banken – politisch geduldet – zu einer Inflationierung ihres Eigenkapitals genutzt werden könnten.
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Global Banking: Endogenous Competition and Risk Taking
Ester Faia, Sébastien Laffitte, Maximilian Mayer, Gianmarco Ottaviano
European Economic Review,
April
2021
Abstract
When banks expand abroad, their riskiness decreases if foreign expansion happens in destination countries that are more competitive than their origin countries. We reach this conclusion in three steps. First, we develop a flexible dynamic model of global banking with endogenous competition and endogenous risk-taking. Second, we calibrate and simulate the model to generate empirically relevant predictions. Third, we validate these predictions by testing them on an original dataset covering the activities of the 15 European global systemically important banks (G-SIBs). Our results hold across alternative measures of individual and systemic bank risk.
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Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital?
Reint E. Gropp, Thomas Mosk, Steven Ongena, Ines Simac, Carlo Wix
Abstract
We study how higher capital requirements introduced at the supranational and implemented at the national level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that affected banks inflate their levels of regulatory capital without a commensurate increase in their book equity and without a reduction in bank risk. This observed regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten. Our results suggest that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.
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Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital
Reint E. Gropp, Thomas Mosk, Steven Ongena, Ines Simac, Carlo Wix
VOXEU COLUMN,
February
2021
Abstract
The implementation of supranational regulations at the national level often provides national authorities with substantial room to engage in discretion and forbearance. Using evidence from a supranational increase in bank capital requirements, this column shows that national authorities may assist banks' efforts to inflate their regulatory capital to pass such supranational requirements. While supranational rules should be binding in theory, national discretion may effectively undermine them in practice.
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Market Power and Risk: Evidence from the U.S. Mortgage Market
Carola Müller, Felix Noth
Economics Letters,
2018
Abstract
We use mortgage loan application data of the Home Mortgage Disclosure Act (HMDA) to shed light on the role of banks’ market power on their presumably insufficient risk screening activities in the U.S. mortgage market in the pre-crisis era. We find that banks with higher market power protect their charter value. The effect is stronger for banks that have more information about local markets.
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Assessing the Effects of Regulatory Bank Levies
Claudia M. Buch, Lena Tonzer, Benjamin Weigert
VOX CEPR's Policy Portal,
2017
Abstract
In response to the Global Crisis, governments have implemented restructuring and resolution regimes backed by funds financed by bank levies. Bank levies aim to internalise system risk externalities and to provide funding for bank recovery and resolution. This column explores bank levy design by considering the German and European cases. The discussion points to the importance of structured policy evaluations to determine the effects of levies.
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