Quantifying and explaining parameter heterogeneity in the capital regulation-bank risk nexus |
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Authors: | Manthos D. Delis Kien C. Tran Efthymios G. Tsionas |
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Affiliation: | 1. Faculty of Finance, Cass Business School, City University, 106 Bunhill Row, London EC1Y 8TZ, UK;2. Department of Economics, University of Lethbridge, Lethbridge, Alberta T1K 3M4, Canada;3. Department of Economics, Athens University of Economics and Business, 76 Patission Street, Athens 10434, Greece |
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Abstract: | By examining the impact of capital regulation on bank risk-taking using a local estimation technique, this paper attempts to quantify for the first time the heterogeneous response of banks towards this type of regulation in banking sectors of western-type economies. Subsequently, using this information, 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 macroeconomic conditions. An important implication of the findings is that common capital regulatory umbrellas are not sufficient to promote financial stability, especially if they are not accompanied by supervisory effectiveness. On the basis of our findings, we contend that more focus should be placed on the actions needed to restrain excessive risk-taking of banks. |
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