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• Introducing a novel metric based on Bushman and Williams (2015) 's model to measure the timeliness of bank provisions during the 2007–2009 subprime crisis. • Revealing that banks with dedicated credit risk officers or committees experienced the most significant improvement in provision expectations during the crisis, highlighting governance's role in risk management. • Uncovering structural breaks in provision disclosures during the financial crisis, emphasizing the need for adaptive risk management strategies in turbulent times. This paper examines changes in the provisioning expectations of U.S. banks during the 2007–2009 subprime crisis. We used Bushman Williams (2015)'s model for delayed expected loss recognition (DELR) to create a statistic that captures a relative estimate of the timeliness of bank provisions. Our findings show that there was a large decline in DELR during the subprime crisis period. We demonstrate that it was the banks with an officer or a committee dedicated to analyzing credit risk that had the greatest improvement in their provision expectations. [ABSTRACT FROM AUTHOR]

This paper examines the impact of corruption, economic freedom, bank regulation and transparency on bank profitability and bank stability using a sample of 326 banks from the 19 Eurozone countries over the period 2005–2018. We use a balanced panel data set and the Arellano-Bond Generalized Method of Moments dynamic panel estimation procedure. We find that corruption and transparency have a negative effect on bank profitability and bank stability. By contrast, greater economic freedom boosts profitability and banking stability. Our results show that regulation is positively related to bank profitability and its precise effects on stability depend upon the nature of the regulation. We additionally examine how our results are affected by Governance issues and the addition of 5 other European countries from outside the Eurozone. Our overall results indicate that the impact of the variables of interest is sensitive to the precise measures chosen to calculate profitability and financial stability. [ABSTRACT FROM AUTHOR]

• We proposes a new liquidity and capital adequacy risk index, the Piggy Bank Index. • We use data from the financial statements of 106 US banks during 2004–2009. • We test the Piggy Bank Index as an early warning indicator. • This index is successfully tested for Merrill Lynch in 2008 and Silicon Valley Bank, First Republic Bank and Silvergate Bank in 2023. This study proposes a new liquidity and capital adequacy risk index, the Piggy Bank Index. This index measures the gap between liquid assets and total liabilities over liquid capital. Using data from the financial statements of 106 US banks during 2004–2009, we show the benefits of this index as an early warning indicator for liquidity and capital adequacy problems. The Piggy Bank Index becomes more effective as the bank failure approaches. The evidence shows that the further and the longer the bank's Piggy Bank Index is out of the 95 % confidence interval of the "healthy" banks, the closer the bank will be to failure. This index was successfully tested for the cases of Merrill Lynch in 2008, and for the case of Silicon Valley Bank, First Republic Bank and Silvergate Bank in 2023. [ABSTRACT FROM AUTHOR]

In this paper we estimate the optimal level of capital for banks in the euro area. This optimum is the result of a trade-off between the costs and benefits of more bank capital: although higher capital requirements likely lead to higher lending rates, they also reduce the likelihood of banking crises. Our baseline estimates show an optimal risk-weighted capital ratio of around 23%. By varying the assumptions underlying our analysis we obtain a range of optimal ratios from 16% to 31%. These estimates are higher than the current Basel III minimum requirements. We also estimate optimal rates for individual member states and find substantial differences between them. This is primarily due to variation across countries in the resilience of their economies. For this reason we find lower optimal bank capital ratios in countries with more stable economies. Our results show only a modest dependence on the ease with which banks in different member states are able to raise capital. [ABSTRACT FROM AUTHOR]

With a comprehensive dataset covering 129 countries over 1995–2013, this study investigates the impact of bank globalization on financial stability. I find strong evidence that foreign bank entry increases both loan risk and the overall risk of bank failure, and threatens the financial stability of the host country. However, this link is dependent on the regulatory and institutional framework of the host country. The adverse impact from foreign banks can be mitigated when the host country has more restrictions on fee-generating activities, less stringent capital requirement, more asset diversification guidelines, a single supervisor, less government-owned banks, lower market entry barrier, and/or less effective credit information sharing. Instead, foreign bank entry could even lower bank risk when host country regulations on bank activities are highly restrictive, capital requirement is less stringent, and/or market entry barrier is low. The need to improve financial stability and that to reduce the adverse impact of foreign bank entry impose conflicting demand on some bank regulations, thus policymakers need to balance both needs and carefully condition the prudential regulations to ensure financial stability and at the same time minimize the adverse impact from foreign bank entry. [ABSTRACT FROM AUTHOR]

We investigate the influence of the institutional environment on bank capital ratios. Using a sample of 160 banks operating in the Middle East and North Africa region for the period 2004–2014, we find that, when stock markets have little presence, institutional variables significantly affect risk-weighted regulatory capital ratios but not leverage ratios. Conversely, when stock markets are more developed, only leverage ratios are influenced by institutional factors. Our results also indicate that institutional variables affect non-weighted equity-to-asset ratios of banks that are listed on a stock exchange. Our findings contribute to the bank capital structure literature and have important policy implications for developing countries. [ABSTRACT FROM AUTHOR]

• OBHC-banks had a 2–3% higher probability of failing than did MBHC-banks during the sub-prime crisis, controlling for the nonrandom assignment and other covariates. • BHCTIER1 is a significant factor influencing the probability of failure for MBHC-banks, but not for OBHC-banks. • In OBHC-banks, a greater number of bank-specific indicators are significant in determining their failures and their marginal effects are stronger than MBHC-banks. Recent regulations increased minimum capital standards for bank holding companies. We test the effectiveness of this action in preventing bank failures during the sub-prime mortgage crisis. We find that while holding company capital is the most influential variable in the failures of banks affiliated with multi-bank holding companies, this is not the case for banks affiliated with a one-bank holding company. For these banks, the bank's own characteristics are more influential than group capital, meaning the established standards may not be universally effective. [ABSTRACT FROM AUTHOR]

Highlights • Estimate benefits and costs of a higher leverage ratio for U.S. commercial banks. • Takes into account the high frequency of U.S. banking crises. • Approach suitable for regulators. • Baseline estimates indicate the optimal ratio equals 19 percent. Abstract This study reports estimates of the marginal benefits and costs of increasing the regulatory minimum bank equity-to-asset "leverage ratio" from 4 to 15 percent. Benefits arise from reducing the probability of a banking crisis. Costs arise from reduced lending, should banks pass off higher equity costs onto borrowers. Net benefits increase with a higher discount rate, a smaller tax advantage of debt, a lower non-financial corporate debt-to-capital ratio, a higher cost of crises, a longer duration of crises or if crises have some permanent effects. Baseline estimates indicate that the benefits equal costs at 19 percent. [ABSTRACT FROM AUTHOR]

This paper examines the effects of macroprudential policy (MaPP) on wealth inequality using a large dataset of 171 countries. I find that, after the adoption of MaPP, wealth concentration in the treated countries increases by 3.4 percentage points in a decade. This finding is explained by a rise in the wealth share of the top 1% combined with a sharp decline in the wealth share of the bottom 50%. These effects are stronger for prudential rules based on income, particularly in advanced economies. [ABSTRACT FROM AUTHOR]

This paper explores the problem of the global financial crisis of 2008–9, using a behavioral perspective to examine in some detail the issue of governance failures. These failures are evident in the inadequate oversight/regulation provided by US financial market regulators, as well as the inability of financial market participants to adequately judge and assign risk measures to key financial instruments. In total, five elements of behavioral finance are shown to characterize the crisis. The paper shows how specific adjustments in government policy (dealing with market structural imperfections) and company governance (dealing mainly with risk management) can respond to the key elements of the crisis. It also points out that future financial crises cannot be avoided, so that mitigation is the only remedy to deal with such phenomena. [ABSTRACT FROM AUTHOR]

This paper contributes to prior literature and to the current debate concerning recent revisions of the regulatory approach to measuring bank exposure to interest rate risk in the banking book by focusing on assessment of the appropriate amount of capital banks should set aside against this specific risk. We first discuss how banks might develop internal measurement systems to model changes in interest rates and measure their exposure to interest rate risk that are more refined and effective than are regulatory methodologies. We then develop a backtesting framework to test the consistency of methodology results with actual bank risk exposure. Using a representative sample of Italian banks between 2006 and 2013, our empirical analysis supports the need to improve the standardized shock currently enforced by the Basel Committee on Banking Supervision. It also provides useful insights for properly measuring the amount of capital to cover interest rate risk that is sufficient to ensure both financial system functioning and banking stability. [ABSTRACT FROM AUTHOR]

The severity and longevity of the recession caused by the 2007 financial crisis has highlighted the lack of a reliable macro-based financial regulation framework. As a consequence, addressing the link between the stability of the financial system as a whole and the performance of the overall economy has become a mandate for policymakers and scholars. Many countries have adopted macroprudential tools as policy responses for safeguarding the financial system. This paper provides a literature review of macroprudential policies, its objectives and the challenges that a macro-based framework needs to overcome, such as financial stability, procyclicality, and systemic risk. [ABSTRACT FROM AUTHOR]

We use a new dataset on regulation and supervision in 42 countries to study the relationship between the regulatory framework and bank efficiency in Africa. Specifically, we examine how bank efficiency is influenced by requirements related to (i) Overall capital stringency, (ii) Restrictions on entry into banking, (iii) Restrictions on bank activities, (iv) Transparency requirements, (v) Restrictions on exit from banking, (vi) Liquidity and diversification requirements, (vii) Price controls (financial repression), (viii) Availability of financial safety nets and (ix) Quality of supervision. We find that increased availability of financial safety nets to have efficiency-enhancing effects for African banks. We also find that the effect of some bank regulation in Africa is highly dependent on the size and risk level of the bank. Specifically, our results suggest that more stringent restrictions on entry increase the efficiency of large banks, while restrictions on exit reduce the efficiency of small banks. Similarly, high-risk banks benefit, in terms of efficiency, from increased restrictions on entry whereas low risk banks do not benefit from increased restrictions on exit. Our results also suggest that small banks are the main losers from increased transparency requirements and price controls while more stringent capital requirements only enhance the efficiency of large banks and low risk banks. Overall, our findings support the argument that regulation should be adapted to the risk and size level of the institutions that are being regulated. [ABSTRACT FROM AUTHOR]

We investigate how a change in regulatory oversight affects bank risk, using the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 as a setting. Using a sample of bank holding companies (BHCs) covering the period 2015Q1 through 2020Q1, we find that risk increases for large BHCs affected by a change in regulatory oversight. In addition to increasing bank level risk, affected BHCs increase their respective contribution to the systemic risk. These BHCs also experience higher profitability, increased market valuation and reduced compliance costs. [ABSTRACT FROM AUTHOR]

We evaluate the Comprehensive Assessment by analysing the database made available by the European Central Bank. We show that the capital deficit of a bank identified by the Comprehensive Assessment is positively related to a market-based risk measure of the bank, such as its historical volatility, and that the post-adjustment leverage ratio, but not the pre-adjustment leverage ratio or the risk-weighted capital ratio, is related to it. These results show that the Comprehensive Assessment captures banks’ riskiness and that the leverage ratio is a better indicator than the risk-weighted capital ratio. [ABSTRACT FROM AUTHOR]

This paper studies the differences in the announcement effects of seasoned equity offerings (SEOs) of commercial banks and non-banks, and explores the influence of bank regulation and the financial crisis on such differences. We find that abnormal stock returns on SEO announcements for US commercial banks are significantly higher than those of non-banks, consistent with the hypothesis that bank regulations reduce the likelihood that bank SEOs signal overpriced equity. The propensity score matching-based difference-in-difference analysis indicates that the differences in stock returns between banks and non-banks decreased during the 2007–2009 financial crisis period and increased after the passage of the Dodd-Frank Act in 2010. [ABSTRACT FROM AUTHOR]

Central Bank supervision is one of the pillars of capital regulation. Based on a unique database built using supervision data from the Central Bank of Brazil, we evaluate the effectiveness of the Central Bank's supervision over banks given the Central Bank's proprietary credit rating and signaling requests for higher capital buffers. We also examine the main determinants of capital buffer management in addition to supervision. We find evidence that (i) Brazilian Central Bank supervision imposes excess capital buffer needs on banks, especially small and midsize banks; (ii) market discipline may play no role in driving capital ratios; and (iii) the business cycle has a negative influence on bank capital cushions, suggesting pro-cyclical capital management. We conclude that supervision plays a major role in markets where market discipline is weak and for smaller banks which act on pro-cyclical way. [ABSTRACT FROM AUTHOR]

Clearinghouses were private organizations that not only had the power to audit member banks’ balance sheets and levy fines, but also provided emergency liquidity during large-scale financial panics. This paper studies how clearinghouses affected bank composition and solvency during stable periods as well as panics. An annual database of all national bank balance sheets from 1865 to 1914 indicates that national banks grew larger after the creation of a clearinghouse. Relative to the rise in assets, banks reduced their cash reserves and individual deposits and increased their loans, circulation, and interbank deposits. The analysis also shows that while clearinghouse members were less likely to fail during panics, they were more likely to fail in other periods, particularly those in non-financial centers. In this way, clearinghouses seem to have freed up additional resources during stable periods and delayed bank failures until the potential for contagion was removed. [ABSTRACT FROM AUTHOR]

This paper analyzes the impact of rules-based bank insolvency resolution on real economic growth. Resolving insolvent banks can positively affect the real economy by overcoming moral hazard problems and improving banks’ credit allocation and monitoring. We propose a new indicator to measure the strength of ‘catharsis’, i.e., how strictly banks are resolved, and use a large firm-level dataset to test its effect. We find that a relatively stronger implementation of bank resolution rules has a statistically and economically significant positive effect on firm growth – particularly with respect to firms that are structurally more dependent on bank financing. Our findings are robust to various specifications. Investigating the transmission channels of this ‘catharsis effect’ reveals that it essentially works by means of benefiting higher quality firms (quality channel) and reallocating credit to firms that need it most (quantity channel). Additional analysis suggests that the ‘catharsis effect’ works best in banking systems that offer access to international financing because such access mitigates the potentially negative credit supply effects of liquidating insolvent banks. Taken together, our findings indicate that more attention should be focused on developing incentive-compatible bank resolution regimes. [ABSTRACT FROM AUTHOR]

Multiple-bank lending is the most prevalent form of bank-firm credit relationships in nearly all countries. It results in high asset commonality and interconnectedness, allows idiosyncratic risks to become systemic, and makes the banking system more fragile and vulnerable to shocks. Using detailed, granular-level, supervisory data on large corporate loans, we show that multiple bank lending is driven, inter alia, by regulatory limits on large credit exposures. These limits, aimed at mitigating an individual bank's concentration risk, force firms to explore alternative sources of funding, making the common borrowers' phenomenon more prominent. We find that multiple bank lending is determined endogenously, and its likelihood increases with the level of portfolio similarity between lenders. The size of the original lender and its systemic importance magnifies this effect. We argue that banks do not internalize the systemic effect of their lending decisions and that multiple bank lending constitutes an insurance mechanism related to an implicit "too-many-to-fail" guarantee. Its externalities are suboptimal and should be reinforced with better monitoring by the related authorities. [ABSTRACT FROM AUTHOR]

• We examine the effect of the 2016 intermediate holding company rule on U.S. FBOs. • We study if FBOs moved assets from non-branches to less regulated branches. • We use detailed regulatory data on within-FBO transactions. • The IHC rule spurred FBOs to reallocate their assets from U.S. subsidiaries to branches. We examine the effect of the 2016 intermediate holding company (IHC) rule on the asset allocation of foreign banking organizations (FBOs) in the United States. Given the costs to establish and maintain an IHC, FBOs may try to reduce the regulatory weight by reallocating assets from the U.S.-regulated IHC-subject activities towards less regulated U.S. branches and agencies (including those located abroad) or downsize the IHC's total assets. We use data on within-FBO transactions to show that the introduction of the IHC rule spurred FBOs to reallocate their assets from ("U.S.-regulated") U.S. subsidiaries toward their ("less regulated") U.S. branches and agencies. [ABSTRACT FROM AUTHOR]

Abstract: This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers. [Copyright &y& Elsevier]

Abstract: The Federal Reserve and the European Central Bank aggressively lowered interest rates during the recent crisis. Both actions were at odds with an anti-inflationary policy stance: in August 2007, inflation expectations were high, particularly in the United States. To explain these actions, we model an economy with a leveraged and regulated financial sector. We find optional Taylor rules using simulated GMM, and find rules consistent with a pro-inflationary reaction during financial crises and a standard output-inflation mandate for the central bank. Our results support procyclical regulation not because of adequacy concerns, but instead due to the impact on monetary policy. [Copyright &y& Elsevier]

Abstract: This paper evaluates a form of contingent capital for financial institutions that converts from debt to equity if two conditions are met: the firm's stock price is at or below a trigger value and the value of a financial institutions index is also at or below a trigger value. This structure potentially protects financial firms during a crisis, when all are performing badly, but during normal times permits a bank performing badly to go bankrupt. I discuss a number of issues associated with the design of a contingent capital claim, including susceptibility to manipulation, whether conversion should be for a fixed dollar amount of shares or a fixed number of shares; uniqueness of the share price when contingent capital is outstanding; the susceptibility of different contingent capital schemes to different kinds of errors (under and over-capitalization); and the losses likely to be incurred by shareholders upon the imposition of a requirement for contingent capital. I also present an illustrative pricing example. [Copyright &y& Elsevier]

Abstract: Recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis, the Basel Committee on Banking Supervision (2011) revised its regulatory framework for trading portfolios. In this paper, we compare: (1) the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk; and (2) the relative adequacy of these frameworks in setting minimum capital requirements. Our main findings are as follows. First, both systems allow the selection of portfolios with substantive tail risk, but one based on the revised framework tends to be less effective in controlling tail risk. Second, the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework. Hence, on balance, the revised framework improves upon the original framework. We also suggest further improvements for consideration by bank regulators. [Copyright &y& Elsevier]

Abstract: Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a systemic risk-shifting incentive where all banks undertake correlated investments, thereby increasing economy-wide aggregate risk. Regulatory mechanisms such as bank closure policy and capital adequacy requirements that are commonly based only on a bank’s own risk fail to mitigate aggregate risk-shifting incentives, and can, in fact, accentuate systemic risk. Prudential regulation is shown to operate at a collective level, regulating each bank as a function of both its joint (correlated) risk with other banks as well as its individual (bank-specific) risk. [Copyright &y& Elsevier]

We study the impact of higher bank capital requirements on corporate lending spreads using granular bank- and loan-level data. Our empirical strategy employs the heterogeneity in capital requirements across banks and time of implementation in Switzerland. We find that changes in the capital deviation from the regulatory minimum affect lending spreads asymmetrically. In response to a reduction in the capital deviation, banks with deficits with respect to their risk-weighted capital requirement raise spreads relative to banks with surpluses and de-leverage. Banks respond to higher requirements by raising spreads and, for deficit banks, by cutting lending. [ABSTRACT FROM AUTHOR]

Rank–size analysis is a powerful methodological instrument for describing the main features of a unified system by moving from an available sample of its disaggregated elements. We here study the rank–size relationship of banks' total assets in a sample of 13 advanced economies. We show that a standard power-law function is unable to provide an adequate fit of the data, while a Discrete Generalized Beta Distribution provides a statistically satisfactory fit, being able to capture the behaviour of the distribution at low and high ranks. We then analyse the relationship between the parameters of the Discrete Generalized Beta Distribution estimated in each country and the main features of the country's banking industry. Our results point to a connection with the degree of development of the banking sector and with some regulatory and institutional characteristics, but no relationship with riskiness. • We use rank–size for the banking systems of a relevant set of countries. • We show that a Generalized Beta law fits the data much better than power law. • We analyse regularities and discrepancies in terms of banks' total assets. • We discuss the findings in the light of the risk profiles of the banks. • We explore how the best-fit curves are linked to countries' institutional features. [ABSTRACT FROM AUTHOR]

This paper uses granular data on syndicated loans to analyse the impact of international reforms for Global Systemically Important Banks (G-SIBs) on bank lending behaviour. Using a difference-in-differences estimation strategy, we find no effect of the reforms on overall credit supply, while at the same time documenting a substantial decline in borrower- and loan-specific risk factors for the affected banks. Moreover, we detect a significant decline in the pricing gap between interest rates charged by G-SIBs and other banks, which we interpret as indirect evidence for a reduction in funding cost subsidies. Overall, our results suggest that the G-SIB reforms have helped to mitigate moral hazard problems associated with systemically important banks, while the consequences for the real economy have been limited. [ABSTRACT FROM AUTHOR]

Abstract: In the dynamic model of banking, a bank''s option to hide its loan losses by rolling over non-performing loans is shown to worsen moral hazard. Contrary to the classic theory, moral hazard may arise even when a bank cannot seek a correlated risk for its loans. The loans seem to be performing and the bank makes a profit although it is de facto insolvent. When the bank''s balance sheet includes hidden non-performing loans, the bank may optimally shrink lending or gamble for resurrection by growing aggressively. To eliminate this type of moral hazard, which is broadly consistent with evidence from emerging economies, a few regulatory implications are suggested. [Copyright &y& Elsevier]

Abstract: This paper studies the welfare implications of various government policies that have been used to prevent bank runs. The benchmark model suggests that a bank run is a business-cycle-state-related phenomenon and it leads to the failure of the risk-sharing mechanism provided by the banking sector. Extensions of the model show that a number of policy instruments, including the suspension of convertibility of deposits, the taxation on short-term deposits, reserve requirement and blanket guarantee, turn out to be inefficient. Instead, I propose that a limited-coverage deposit insurance scheme or capital requirements can be welfare-improving. [Copyright &y& Elsevier]

Using a novel cross-European dataset on bank internationalization, the paper accounts for organizational and geographic complexity and evaluates its impact on systemic risk and how both the 2008–09 global financial crisis and the 2010–11 European sovereign debt crisis might have modified such an impact. Ahead of the crisis (2005–07), results suggest that bank complexity materially reduces systemic risk and enhances stability, as it encourages banks to take on more diversified risks. While such a relation is inverted during the crisis (2008–11) and after the crisis (2012–13), consistent with the view that, during distress times, international banks have less ability to monitor cross-border risks. Further evidence show that, regardless of the period, the effect of complexity on systemic risk is accentuated for 'too-big-too-fail' banks and banks with strong activity diversity. Conversely, complex banks with merger-acquisition history and banks operating networks of foreign branches mitigate systemic risk during the acute crisis and the later stage of the crisis, respectively. The results are robust to the use of alternative measures of systemic risk and complexity, and numerous additional tests. Findings bear critical policy implications for financial regulations. [ABSTRACT FROM AUTHOR]

This paper investigates the impact of regulation and ownership on the performance of banks in 19 countries in the Middle East and North Africa (MENA) region. We test the hypothesis that the effect of regulation on bank profitability depends on the type of ownership structure. The public and private views of bank regulation are also tested along with the interaction of bank regulation and ownership. We find regulation measures to have a strong influence on bank profitability, whereas ownership structure seems to play a limited role in explaining bank performance in the MENA region. The results support the private view of bank regulation and suggest that capital requirements and private monitoring when interacted with ownership concentration exert a strong influence on bank profitability. When the analysis is done separately for conventional and Islamic banks, we find that the impact of bank regulations though strongly significant, does not depend on the type of ownership structure prevailing in conventional banks. In contrast, regulatory effects seem to be important drivers of profitability of Islamic banks. Therefore, it is very important for policy makers in these countries not to treat the two types of banks identically when setting up and implementing bank regulations especially during the COVID-19 pandemic. • We investigate the effect of regulation and ownership on bank profitability in the MENA region. • We find that the effect of regulation is reinforced in banks with high level of ownership concentration. • Regulatory measures have a significant influence on the profitability of CBs, whereas this effect is insignificant for IBs. • However, regulatory effects depend on the type of ownership prevailing in IBs but not in CBs. [ABSTRACT FROM AUTHOR]

Using a sample of almost 300 European banks, we show that the concentration of ownership leads to larger capital buffers, consistent with theories of interest alignment and the charter value theory. Mixed empirical findings of previous literature suggest that external factors may affect the disciplinary role of controlling owners. In this paper, we demonstrate that the stabilizing impact of concentrated ownership is weaker when the level of regulatory discipline is higher. We also observe a weaker stabilizing impact when the level of market discipline is higher, while this effect seems to be less robust. Moreover, we find evidence for the too-big-to-fail phenomenon, since the stabilizing impact of ownership concentration on capital buffers is significantly weaker for systemically important institutions. Our findings indicate that bank owners are aware of the risk of losing charter value when external monitoring is lower and underline that internal governance of banks should not be discussed in isolation from external governance factors. [ABSTRACT FROM AUTHOR]

Until the 1970s, both banks and nonfinancial corporations relied on performance targets linked to their earnings per share (EPS). Over the next few decades, banks rapidly changed to emphasize return on equity (ROE) as a performance target. Investors seem aware of this change because ROE growth (EPS growth) better explains banks' (nonfinancials') stock market values. Also, manager compensation linked to ROE is more common for banks than for nonfinancials. This paper presents a model of a bank subject to fixed-rate deposit insurance and facing increasing competition that erodes its charter value. When the bank chooses its capital to maximize its shareholder value, its performance based on ROE appears better than its performance based on EPS. Thus, the increase in competition that started in the 1970s, along with fixed-rate deposit insurance, may explain banks' growing preference for ROE over EPS as a performance target. [ABSTRACT FROM AUTHOR]

• This paper examines the impact of bank regulation and supervision on the capital buffer and insolvency risk through the business cycle and income diversification. • Economic downturn with tighter capital regulation diminishes the benefit of the capital buffer. • Increasing official supervision related to the change in the business cycle only brings benefit to capital buffer but harms banks' stability. • Regulators should adjust capital regulation, introduce the tighter restriction on bank activities and an appropriate supervision control to reduce bank risk-taking behaviour. This paper examines whether bank regulation and supervision have independent effects on the capital buffer and insolvency risk or their effects are channelled through the business cycle and income diversification. The findings show that regulatory capital index and supervisor power index have both the direct effect on bank capital buffer as well as bank risk and indirect effects via business cycle, whereas restriction on bank activities indirectly channels its effects through income diversification. Economic downturn with tighter capital regulation diminishes the benefit of the capital buffer. The restriction on bank activities policy is not effective for EU banks that highly involve in risk-taking activities. Increasing official supervision related to the change in the business cycle only brings benefit to capital buffer but harms banks' stability. Regulators should adjust capital regulation on the business cycle, introduce the tighter restriction on bank activities and an appropriate supervision control to reduce bank risk-taking behaviour. [ABSTRACT FROM AUTHOR]

• Business cycles across European countries are not perfectly synchronized, providing room for risk reduction by banks via cross-border operations. • Considering all foreign activities of 61 European banks, including those via branches and direct lending, European banks invest 40.4% of their assets outside their home country. • Cross-border banking decreases banks' insolvency risk and results in more stable returns. • The results contribute to policy discussions on the progress of the single European banking market, and on the treatment of cross-border lending in the regulatory framework and in supervision. Banks that straddle borders may not only do so via foreign subsidiaries; they can also conduct their cross-border banking activities via a branch or directly to customers. Existing studies on the impact of cross-border banking often focus on the cross-border activities via foreign subsidiaries. We use a unique hand-collected dataset with cross-border activities for the 61 largest European banks to study the impact cross-border banking has on the risk-return profile of an individual bank. Our results show that cross-border banking decreases banks' risk, by lowering the insolvency risk and generating a more stable income profile. [ABSTRACT FROM AUTHOR]

We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would "probably decrease" both the likelihood and social cost of a crisis with "minimal to no change" to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending. [ABSTRACT FROM AUTHOR]

Market participants argue that a significant unintended consequence of post-crisis regulatory leverage ratio requirements is a reduction in the liquidity of fixed income markets. We assess this claim in the context of the gilt (U.K. government bond) and gilt repo markets over the period 2010 to 2017. We find that gilt repo liquidity worsened during the period when U.K. leverage ratio policy was introduced, and that gilt liquidity worsened conditional on factors such as funding costs and inventory risk. We also find evidence that gilt repo liquidity has become less resilient. However, evidence from heterogeneity in dealer behavior is inconclusive regarding a causal link between leverage ratio requirements and the reduction in market liquidity. • We investigate the impact of regulatory leverage ratio requirements on liquidity. • Gilt repo liquidity worsened as UK regulatory requirements were introduced. • Gilt liquidity worsened conditional on funding costs and inventory risk. • But evidence from dealer behavior is inconclusive regarding causality. [ABSTRACT FROM AUTHOR]

EBA capital shortfall in terms of total assets vs. S R I S K. EBA 2014 leverage-based stress test (Eq. (12)) vs. S R I S K (EUR billions). V-Lab download date: December 31, 2013. In this paper, we compare the results of the European Banking Authority (EBA) stress tests conducted in 2014 with the market-based measures of capital losses, which are the marginal expected shortfall (M E S), the systemic risk measure (S R I S K) and the delta conditional value at risk (Δ C o V a R). These measures allow us to estimate the expected capital shortfall in the case of a crisis. The empirical analysis is performed on a sub-sample of the banks included in the stress test exercise, because only 57 European banks, in 22 countries, are publicly traded. We find that the S R I S K is the best predictor of systemic risk among the 3 systemic risk measures, since it is the most correlated with the stress test results. Furthermore, we focus on the realized outcomes (realized loss, realized return and realized volatility) and compare them with the 2014 EU stress test results. [ABSTRACT FROM AUTHOR]