We examine the impact of foreign bank presence on a host countries’ business regulatory environment. We employ a panel dataset of 87 developing economies for the 1995–2013 period and measure the efficiency of business regulations using the indices from the Heritage and the Fraser datasets. Our results show that foreign bank presence exerts a positive impact on the efficiency of business regulations; however, we find no evidence in favor of a more pronounced positive effect when foreign banks originate from countries that have a more efficient business regulatory environment. Moreover, host countries’ administrative requirements and, particularly, bureaucracy costs benefit from a foreign bank presence; however, cost and time procedures to start a business do not

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

This paper empirically analyzes how capital regulation, risk, and other factors altered the relative use of shadow banking-funded, short-term business debt since the early 1960s. Results indicate that the share was affected over the long run not only by changing information and reserve requirement costs, but also by shifts in relative regulation of bank versus nonbank credit sources—such as Basel I in 1990 and reregulation in 2010. In the short-run, the shadow bank share rose when deposit interest rate ceilings were binding on traditional banks, the economic outlook improved, or risk premia declined, and fell when event risks arose

We study the macroprudential roles of bank capital regulation and monetary policy in a borrowing cost channel model with endogenous financial frictions, driven by credit risk, bank losses and bank capital costs. These frictions induce financial accelerator mechanisms and motivate the examination of a macroprudential toolkit. Following credit shocks, countercyclical regulation is more effective than monetary policy in promoting price, financial and macroeconomic stability. For supply shocks, combining macroprudential regulation with a stronger anti-inflationary policy stance is optimal. The findings emphasize the importance of the Basel III accords in alleviating the output-inflation trade-off faced by central banks, and cast doubt on the desirability of conventional (and unconventional) Taylor rules during periods of financial distress

Bank managers can buy risky assets through a regulated bank and through an off-balance sheet special purpose vehicle (SPV). The choice of the preferred entity depends on whether bank managers can lower the cost of SPV funding by guaranteeing SPV returns with bank proceeds. When there are no guarantees, using the SPV is more profitable for high levels of the minimum capital requirement, in which case the SPV crowds out the bank. Contrary, when bank managers guarantee SPV returns, the bank needs to operate for the SPV to take advantage of recourse to the bank’s balance sheet also when the capital requirement is high. The bank and the SPV intermediation become complements

Non-performing loans (NPLs) represent a major obstacle to the development of banking sector. One of the key objectives of the banking sector reforms in China has therefore been to reduce the high level of NPLs. To do so, Chinese regulatory authorities have injected significant capital into the banking system and scrutinized NPLs since 2003. This paper examines the impact of NPLs on bank behavior in China. Using a threshold panel regression model and a dataset covering 60 city commercial banks, 16 state-owned banks and joint-stock banks, and 11 rural commercial banks during 2006–2012, we test whether lending decisions of Chinese banks exhibit moral hazard. The results support the moral hazard hypothesis, suggesting that an increase in the NPLs ratio raises riskier lending, potentially causing further deterioration of the loan quality and financial system instability. Policy implications of findings are evaluated

This paper analyzes the net impact of two opposing effects of active risk management at banks on their stability: higher risk-taking incentives and better isolation of credit supply from varying economic conditions. We present a model where banks actively manage their portfolio risk by buying and selling credit protection. We show that anticipation of future risk management opportunities allows banks to operate with riskier balance sheets. However, since they are better insulated from shocks than banks without active risk management, they are less prone to insolvency. Empirical evidence from US bank holding companies broadly supports the theoretical predictions. In particular, we find that active risk management banks were less likely to become insolvent during the crisis of 2007–2009, even though their balance sheets displayed higher risk-taking. These results provide an important message for bank regulation, which has mainly focused on balance-sheet risks when assessing financial stability

We analyze the impact of a requirement similar to the Basel III Liquidity Coverage Ratio on the bank intermediation applying Regression Discontinuity Designs. Using a unique dataset on Dutch banks, we show that a liquidity requirement causes long-term borrowing and lending rates as well as demand for long-term interbank loans to increase. Lower levels of aggregate liquidity increase the estimated effects. Short-term borrowing and lending rates only rise during periods of lower market-wide liquidity. Further, banks do not seem able to pass on the increased funding costs in the interbank market to their private sector clients. Rather, a liquidity requirement seems to decrease banks’ interest margins

Supranational resolution of insolvent banks does not necessarily improve welfare. Supranational regulators are more inclined to bail-out banks indebted towards international creditors because they take into account cross-border contagion. When banks’ creditors are more likely to be bailed out, market discipline decreases and risk-taking by indebted banks increases. Depending on the trade-off between giving the right incentives ex ante and limiting contagion ex post, both a national and a supranational resolution framework can be optimal. In particular, if market discipline is low under both national and supranational resolution mechanisms, supranational resolution improves welfare as it stimulates interbank trade

We study regulatory enforcement actions issued against US banks to show that both board monitoring and advising are effective in preventing misconduct by banks. While better monitoring by boards prevents all categories of misconduct, better advising prevents misconduct of a technical nature. Board monitoring increases the likelihood that misconduct is detected, increases the penalties imposed on the CEO, and alleviates shareholder wealth losses following the detection of misconduct by regulators. Our article offers novel insights on how to structure bank boards to prevent bank misconduct