Knowledge that Transforms

Using comprehensive regulatory intensity metrics from 1993 to 2019, we document that increased regulatory burden significantly reduces stock liquidity in U.S. public firms. To establish causality, we exploit exogenous variation in regulatory intensity following state ruling party changes. This identification strategy confirms that the negative relationship is causal rather than merely correlational. Our analysis reveals that information asymmetry serves as the primary mechanism, as regulatory intensity increases uncertainty about firms’ future operations, exacerbating information asymmetry between investors and companies. The liquidity deterioration is particularly pronounced for firms with higher investment irreversibility, greater financial constraints, and those without government customers. These findings contribute to understanding how regulatory burdens affect market functioning.

Banks play a central role in the financial system and benefit the real economy by managing risk, and providing finance to households, small and medium-sized enterprises, large corporates and governments. However, their complexity, opacity and interconnectedness can elevate bank-level and systemic risks, posing dangers to the financial system and real economy. This was evident during the global financial crisis where taxpayer funded bailouts were used to rescue ailing banks, which in turn led to an overhaul of regulation and supervision. Consequently, safeguarding bank stability and addressing systemic risks via well designed regulations is essential for ensuring economic resilience and societal well-being. This study uses a quasi-natural experimental research design in the form of the Dutch Liquidity Balance Rule (LBR) to evaluate the impacts of liquidity regulation on bank-level stability and systemic risk. Our findings show that following the introduction of liquidity regulation, the stability of Dutch banks increases significantly relative to counterparts in neighbouring countries unaffected by the regulation. The observed reduction in risk stems from improved capitalization and reduced leverage, which contribute to greater financial stability. Systemic risk also decreases. Our findings have relevance beyond our research setting for policymakers tasked with implementing and monitoring the impacts of similar forms of liquidity regulation (such as bank liquidity coverage ratios) post global financial crisis.

This paper introduces the ``limited arbitrage'' asset pricing mechanism into a pure exchange general equilibrium economy. The ``limited arbitrage'' model insists on the role of financial intermediaries in conducting fire sales. In our model, financial markets are incomplete, and households face uninsured idiosyncratic endowment risks. Given such market incompleteness, financial intermediaries can gain arbitrage profits by issuing risk-free debts and investing in risky assets. However, the margin requirement ratio limits the amount of debt. Shocks to intermediaries' balance sheets force them to repay debt and sell shares, causing stock prices to deviate from fundamental levels. We investigate how the risk of a fire sale affects the desirable financial regulation. Lowering the margin requirement ratio has the following trade-offs for welfare. On the one hand, it exaggerates a decline in stock prices due to fire sales, which deteriorates welfare. On the other hand, it improves welfare by providing households with sufficient self-insurance measures against their idiosyncratic endowment risks. Our numerical examples show that a natural debt limit under a laissez-faire economy is undesirable. Governments can improve welfare by introducing financial regulations (raising the margin requirement ratio).

By analyzing a sample of US and European listed banks over the years 2015–2022, we investigate the relationship between greenwashing behavior and systemic risk. We use a measure of greenwashing that considers the consistency of what banks disclose with what they actually do to address ESG-related issues. We find that engaging in greenwashing practices contributes to undermining financial stability, with a rise in systemic risk which is exacerbated for less efficient and larger banks. Market seems to acknowledge a superior informative value to banks’ actual ESG performance, giving less importance to what they disclose. Finally, a better performance in each of the environmental, social and governance dimensions reduces systemic risk, but only a bank’s commitment in addressing environment-related issues seems to moderate the contribution of greenwashing to financial system fragility.

This study analyzes the evolution of climate-risk discourse in banking using 4,887 news articles (2008–2024) collected from ProQuest. We apply Natural Language Processing and add two novel layers: (i) an event-alignment analysis that links coverage dynamics to dated policy and supervisory milestones, and (ii) a discourse-network analysis connecting banks and regulators. We document a marked post-2020 shift, with ESG emerging as the dominant framing (7,860 mentions) alongside persistent geographic asymmetries (U.S.-led coverage) and uneven sectoral engagement (Risk Management highest salience; Fintech lowest). Sentiment skews positive (≈4,000 positive vs. ≈1,500 negative), and topic modeling identifies eight stable thematic clusters spanning operations, ratings, ESG assessment, disclosures, and market instruments. Event alignment shows media attention is typically anticipatory (median peak two months before an anchor), with COP26 producing a sustained level shift (+100% within a ±6-month window) and the Bank of England’s CBES results generating the largest single spike (210 articles), whereas some 2022 rule-making announcements (e.g., SEC climate-disclosure proposal) exhibit sharper but less durable attention. The discourse network centers on two regulatory hubs (the Federal Reserve and the ECB) with key banks (e.g., Citigroup, JPMorgan, UBS) bridging into supervisory narratives. Collectively, the findings show climate risk becoming embedded in core banking practice while revealing structural, regional, and functional asymmetries that matter for policy design and implementation. • Provides the first longitudinal NLP-based analysis of climate risk discourse in the banking sector • Reveals how climate risk integration in banking has evolved across regulatory, operational, and market dimensions • Identifies distinct thematic domains shaping climate risk narratives in banking over time • Shows that climate risk discourse is predominantly anticipatory around major policy and supervisory milestones • Maps the institutional structure of climate risk governance by linking banks and regulators within a discourse network