Menu Expand

Cite JOURNAL ARTICLE

Style

Ferri, GPesic, V (2020). The Spillover Effects of Prudential Regulation on Banking Competition. Vierteljahrshefte zur Wirtschaftsforschung, 89(1), 59-100. https://doi.org/10.3790/vjh.89.1.59
Ferri, Giovanni Pesic, ValerioFerri, Giovanni Pesic, Valerio (2020). "The Spillover Effects of Prudential Regulation on Banking Competition" Vierteljahrshefte zur Wirtschaftsforschung, vol. 89no. 1, 2020 pp. 59-100. https://doi.org/10.3790/vjh.89.1.59
Ferri, GPesic, V (2020). The Spillover Effects of Prudential Regulation on Banking Competition. Vierteljahrshefte zur Wirtschaftsforschung, Vol. 89 (Issue 1), pp 59-100. https://doi.org/10.3790/vjh.89.1.59

Format

The Spillover Effects of Prudential Regulation on Banking Competition

Ferri, Giovanni | Pesic, Valerio

Vierteljahrshefte zur Wirtschaftsforschung, Vol. 89 (2020), Iss. 1 : pp. 59–100

Additional Information

Article Details

Author Details

Giovanni Ferri, Lumsa University (Rome)

  • Giovanni Ferri, Ph.D., full professor of Economics at LUMSA, Rome, where he directs the Master in Management of Sustainable Development Goals (http://mastermsdg.lumsa.it). Prior to that he worked at the University of Bari, the World Bank and the Banca d’Italia. He visited: Hong Kong Monetary Authority, University of Tokyo, Asian Development Bank Institute (Tokyo), Princeton University, NBER. He is editor-in-chief of Economic Notes and of the Journal of Entrepreneurial and Organizational Diversity. He has led (or participated in) research and policy projects in Europe, the Middle East and East Asia. He conducts research on: money, banking and finance, rating agencies, corporate governance, finance-growth links, family business, migration, company internationalization, Chinese economy, inequality, sustainability.
  • Email
  • Search in Google Scholar

Valerio Pesic, Sapienza University (Rome)

  • Valerio Pesic, Ph.D., Associate Professor of Banking and Finance at Sapienza University of Rome, where he teaches “Corporate Finance” and “Corporate and Investment Banking”. He conducts research on: banking strategies and organization, bank business models and performance evaluation, internal control systems & risk management, private equity & venture capital, corporate finance.
  • Email
  • Search in Google Scholar

References

  1. Acharya, V. V., H. Mehran, and A. V. Thakor (2011): Caught between Scylla and Charybdis? Regulating bank leverage when there is rent seeking and risk shifting. Unpublished working paper. New York University.  Google Scholar
  2. Admati, A. R., P. M. DeMarzo, M. F. Hellwig, and P. C. Pfleiderer (2011): Fallacies, irrelevant facts, and myths in the discussion of capital regulation: Why bank equity is not expensive. Unpublished working paper, Stanford University and Max Planck Institute.  Google Scholar
  3. Aiyar, S., C. W. Calomiris, and T. Wieladek (2012): Does macropru leak? Evidence from a UK policy experiment, Bank of England, Unpublished working paper, no. 445.  Google Scholar
  4. Allen, F., E. Carletti, and R. Marquez (2011): Credit market competition and capital regulation, Review of Financial Studies, 24, 983 – 1018.  Google Scholar
  5. Arellano, M., and S. Bond (1991): Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations, Review of Economic Studies, 58: 277 – 297.  Google Scholar
  6. Arellano, M., and O. Bover (1995): Another look at the instrumental variable estimation of error-components models, Journal of Econometrics, 68: 29 – 51.  Google Scholar
  7. Avery, R. B., and A. N. Berger (1991): Risk-based capital and deposit insurance reform, Journal of Banking and Finance, 15, 847 – 874.  Google Scholar
  8. Ayadi, R., W. P. De Groen, I. Sassi, W. Mathlouthi, H. Rey, and O. Aubry (2016a): Banking Business Models Monitor 2015 Europe, International Research Center on Cooperative Finance, January 14.  Google Scholar
  9. Ayadi, R., G. Ferri, and V. Pesic (2016b): Regulatory Arbitrage in EU Banking: Do Business Models Matter?, International Research Center on Cooperative Finance, working paper, July.  Google Scholar
  10. BCBS (1988): International convergence of capital measurement and capital standards, Bank for International Settlements, July  Google Scholar
  11. BCBS (1996): Amendment to the Capital Accord to Incorporate Market Risks, Bank for International Settlements, January.  Google Scholar
  12. BCBS (1999): A New Capital Adequacy Framework, Bank for International Settlements, June.  Google Scholar
  13. BCBS (2005): Studies on the Validation of Internal Rating Systems, Bank for International Settlements, May.  Google Scholar
  14. BCBS (2006): Basel II international convergence of capital measurement and capital standards. A revised framework: comprehensive version, Bank for International Settlements, June.  Google Scholar
  15. BCBS (2011): Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (revised version), Bank for International Settlements, June.  Google Scholar
  16. BCBS (2012): Core Principles for Effective Banking Supervision, Bank for International Settlements, September.  Google Scholar
  17. BCBS (2015): Report on the impact and accountability of banking supervision, Bank for International Settlements, July.  Google Scholar
  18. Berger, A., and C. Bouwman (2013): How does capital affect bank performance during financial crises?, Journal of Financial Economics, 109 (1), 146 – 176.  Google Scholar
  19. Berger, A. N., R. J. Herring, and G. P. Szegö (1995): The role of capital in financial institutions, Journal of Banking and Finance, 19, 393 – 430.  Google Scholar
  20. Berger, A. N., and G. F. Udell (1994): Did risk-based capital allocate bank credit and cause a ‘credit crunch’ in the United States?, Journal of Money, Credit and Banking, 26 (3), 585 – 628.  Google Scholar
  21. Bernanke, B. S., and C. S. Lown (1991): The credit crunch, Brookings Papers on Economic Activity 2, 205 – 247.  Google Scholar
  22. Blum, J. (1999): Do capital adequacy requirements reduce risks in banking?, Journal of Banking and Finance, 23, 755 – 771.  Google Scholar
  23. Blundell, R., and S. Bond (1998): Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics, 87: 115 – 143.  Google Scholar
  24. Blundell-Wignall, A., and P. Atkinson (2010): Thinking beyond basel III: necessary solutions for capital and liquidity, OECD Journal: Financial Market Trends, 2010 (1), 1 – 23.  Google Scholar
  25. Brinkmann, E. J., P. M. Horvitz (1995): Risk-based capital standards and the credit crunch, Journal of Money, Credit and Banking, 27 (3), 848 – 863.  Google Scholar
  26. Calem, P., and R. Rob (1999): The impact of capital-based regulation on bank risk-taking, The Journal of Financial Intermediation, 8, 317 – 352.  Google Scholar
  27. Calomiris, C. W., and R. J. Herring (2011): Why and how to design a contingent convertible debt requirement. Unpublished working paper. Columbia University and University of Pennsylvania.  Google Scholar
  28. Calomiris, C. W., and J. R. Mason (2003): Consequences of bank distress during the Great Depression, American Economic Review, 93, 937 – 947.  Google Scholar
  29. Calomiris, C. W., and A. Powell (2001): Can emerging market bank regulators establish credible discipline? The case of Argentina, 1992 – 99. In: Mishkin, F. S. (Ed.), Prudential Supervision: What Works and What Doesn’t. National Bureau of Economic Research, University of Chicago Press, Chicago, IL, pp. 147 – 191.  Google Scholar
  30. Calomiris, C. W., and B. Wilson (2004): Bank capital and portfolio management: the 1930s “capital crunch” and the scramble to shed risk, Journal of Business, 77, 421 – 455.  Google Scholar
  31. Cathcart, L., L. El-Jahel, and R. Jabbour (2015): Can regulators allow banks to set their own capital ratios?, Journal of Banking and Finance, 53, 112 – 123.  Google Scholar
  32. Chami, R., and T. Cosimano (2010): Monetary policy with a touch of Basel, Journal of Economics and Business, 62, 161 – 175.  Google Scholar
  33. Chen, J., and K. Song (2013): Two-sided matching in the loan market, International Journal of Industrial Organization, 31,145 – 152.  Google Scholar
  34. De Haan, L., and J. Kakes (2018): European banks after the global financial crisis: Peak accumulated losses, twin crises and business models, DNB Working Paper, n. 600, July.  Google Scholar
  35. Demirguc-Kunt, A., E. Detragiache, and O. Merrouche (2010): Bank capital lessons from the financial crisis, Journal of Money, Credit and Banking, 45 (6), 1 – 32, 1147 – 1164.  Google Scholar
  36. Estrella, A., S. Park, and S. Peristiani (2000): Capital ratios as predictors of bank failure, Federal Reserve Bank of New York Economic Policy Review, 33 – 52.  Google Scholar
  37. Ferri, G., and V. Pesic (2017): Bank regulatory arbitrage via risk weighted assets dispersion, Journal of Financial Stability, 33, 331 – 345.  Google Scholar
  38. FSB, Thematic Review on Supervisory Frameworks and Approaches for SIBs, Peer Review Report, Financial Stability Board, May.  Google Scholar
  39. Furfine, C. (2000): Evidence on the Response of US Banks to Changes in Capital Requirements, BIS Working papers, No. 88, 1 – 20.  Google Scholar
  40. Furlong, F. T., and M. C. Keely (1987): Bank capital regulation and asset risk, Economic Review, Federal Reserve Bank of San Francisco Spring, 1 – 23.  Google Scholar
  41. Furlong, F. T., and M. C. Keely (1989): Capital regulation and bank risk-taking: a note, Journal of Banking and Finance, 13, 883 – 891.  Google Scholar
  42. Gambacorta, L., and P. Mistrulli (2004): Does bank capital affect lending behavior?, Journal of Financial Intermediation, 13, 436 – 457.  Google Scholar
  43. Gennotte, G., and D. Pyle (1991): Capital controls and bank risk, Journal of Banking and Finance, 15 (4 – 5), 805 – 824.  Google Scholar
  44. Gilbert, R. A. (2006): Keep the Leverage Ratio for Large Banks to Limit the Competitive Effects of Implementing Basel II Capital Requirements, Networks Financial Institute at Indiana State University, Working Paper 2006-PB-01, pp. 1 – 33.  Google Scholar
  45. Goddard, J., P. Molyneux, J. Wilson, and M. Tavakoli (2007): European banking: An overview, Journal of Banking and Finance, 31, 1911 – 1935.  Google Scholar
  46. Haldane, A. G., and V. Madouros (2012): The dog and the Frisbee, Federal Reserve Bank of Kansas City’s 366th Economic Policy Symposium, 31 August.  Google Scholar
  47. Hancock, D., and J. A. Wilcox (1994): Bank capital and the credit crunch: the roles of risk weighted and unweighted capital regulations, Journal of the American Real Estate and Urban Economics Association, 22 (I), 59 – 94.  Google Scholar
  48. Hart, O., and L. Zingales (2011): A new capital regulation for large financial institutions, American Law and Economics Review, 13, 453 – 490.  Google Scholar
  49. Holmstrom, B., and J. Tirole (1997): Financial intermediation, loanable funds, and the real sector, Quarterly Journal of Economics, 112, 663 – 691.  Google Scholar
  50. International Monetary Fund (2012): Restoring Confidence and Progressing on Reforms, Global Financial Stability Report, October.  Google Scholar
  51. Jackson, P., C. Furfine, H. Groeneveld, D. Hancock, D. Jones, W. Perraudin, L. Radecki, and M. Yoneyama (1999): Capital requirements and bank behavior: The impact of the Basel accord. Basel Committee on Banking Supervision, Working Paper No. 1, April.  Google Scholar
  52. Jeitschko, T., and S. D. Jeung (2005): Incentives for risk-taking in banking: A unified approach, Journal of Banking and Finance, 29, 759 – 777.  Google Scholar
  53. Jiménez, G., S. Ongena, J. L. Peydró, and J. Saurina (2012): Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications, American Economic Review, 102, 2301 – 2326.  Google Scholar
  54. Kahane, Y. (1977): Capital adequacy and the regulation of financial intermediaries, Journal of Banking and Finance, 1, 207 – 218.  Google Scholar
  55. Kamada, K., and K. Nasu (2000): How Can Leverage Regulations Work for the Stabilization of Financial Systems?, Bank of Japan Working Paper Series, No. 10-E-2, pp. 1 – 56.  Google Scholar
  56. Kashyap, A. K., R. G. Rajan, and J. C. Stein (2008): Rethinking capital regulation, Federal Reserve Bank of Kansas City Symposium on “Maintaining Stability in a Changing Financial System,” Jackson Hole, Wyoming.  Google Scholar
  57. Keely, M., and F. Furlong (1990): A reexamination of mean variance analysis of bank capital regulation, Journal of Banking and Finance, 14, 69 – 84.  Google Scholar
  58. Kiema, I., and E. Jokivuolle (2010): Leverage Ratio Requirement and Credit Allocation Under Basel III, University of Helsinki and Bank of Finland, Discussion Paper No. 645, pp. 1 – 28.  Google Scholar
  59. Kim, D., and A. M. Santomero (1988): Risk in banking and capital regulation, Journal of Finance, 35, 1219 – 1233.  Google Scholar
  60. Kim, M., E. G. Kristiansen, and B. Vale (2005): Endogenous product differentiation in credit markets: what do borrowers pay for?, Journal of Banking and Finance, 29, 681 – 699.  Google Scholar
  61. Koehn, M., and A. M. Santomero (1980): Regulation of bank capital and portfolio risk, Journal of Finance, 35 (5), 1235 – 1244.  Google Scholar
  62. Mehran, H., and A. V. Thakor (2011): Bank capital and value in the cross- section, Review of Financial Studies, 24, 1019 – 1067.  Google Scholar
  63. Osborne, M., A.-M. Fuertes, and A. Milne (2012): In good times and in bad: bank capital ratios and lending rates, UK Financial Services Authority.  Google Scholar
  64. Peek, J., and E. Rosengren (1992): The capital crunch in New England, Federal Reserve Bank of Boston New England Economic Review, 21 – 31.  Google Scholar
  65. Peek, J., and E. Rosengren (1994): Bank real estate lending and the New England capital crunch, Real Estate Economics, 22 (1), 33 – 58.  Google Scholar
  66. Peek, J. and E. Rosengren (1995a): Bank regulation and the credit crunch, Journal of Banking and Finance, 19, 679 – 692.  Google Scholar
  67. Peek, J. and E. Rosengren (1995b): The capital crunch: neither a borrower nor a lender be, Journal of Money, Credit, and Banking, 27 (3), 625 – 639.  Google Scholar
  68. Rochet, J. C. (1992): Capital requirements and the behavior of commercial banks, European Economic Review, 36, 1137 – 1178.  Google Scholar
  69. Santos, J. (2001): Bank capital regulation in contemporary banking theory: A review of the literature, Financial Markets, Institutions, and Instruments, 10, 41 – 84.  Google Scholar
  70. Shrieves, R. E., and D. Dahl (1992): The relationship between risk and capital in commercial banks, Journal of Banking and Finance, 16, 439 – 457.  Google Scholar
  71. Stolz, S. (2002): The relationship between bank capital, risk-taking, and capital regulation: A review of the literature. Manuscript, Kiel Institute for World Economics.  Google Scholar
  72. Thakor, A. (1996): Capital requirements, monetary policy, and aggregate bank lending: Theory and empirical evidence, Journal of Finance, 51, 279 – 324.  Google Scholar
  73. Thakor, A. V. (2012): Incentives to innovate and financial crises, Journal of Financial Economics, 103, 130 – 148.  Google Scholar
  74. Wang, L. (2005): Bank capital requirements and the effectiveness of monetary policy. Manuscript, Peking University.  Google Scholar

Abstract

Summary: European supervisors aggressively requested more capital at large banks. That may cut credit to the economy. We confirm that especially larger banks cut loans while less-significant banks partly offset that credit drop. Moreover, we identify nasty spillovers from that interaction. Specifically, larger banks’ deleveraging was associated with significant portfolio worsening for mid-sized banks. We conjecture that while small banks’ loan expansion was somewhat shielded by superior soft-information-based technologies, medium-sized banks were fully exposed to lending to bad borrowers as they boosted loans by relying on credit scoring and Internal Rating Based models. That is proving tricky through the prolonged European dip.