We estimate the causal effect of liquidity regulation on bank balance sheets. We take advantage of the heterogeneous implementation of tighter liquidity regulation by the UK Financial Services Authority in 2010. We find that banks adjusted the composition of both assets and liabilities, increasing the share of high quality liquid assets and non-financial deposits while reducing intra-financial loans and short-term wholesale funding. We do not find evidence that the tightening of liquidity regulation caused banks to shrink their balance sheets, nor reduce the amount of lending to the non-financial sector

We measure market reactions to announcements concerning liquidity regulation, a key innovation in the Basel framework. Our initial results show that liquidity regulation attracts negative abnormal returns. However, the price responses are less pronounced when coinciding announcements concerning capital regulation are backed out, suggesting that markets do not consider liquidity regulation to be binding. Bank- and country-specific characteristics also matter. Liquid balance sheets and high charter values increase abnormal returns whereas smaller long-term funding mismatches reduce abnormal returns. Banks located in countries with large government debt and tight interbank conditions or with prior domestic liquidity regulation display lower abnormal returns

We study the liquidity behavior of commercial banks in response to negative capital shocks. Using pre-Basel III data, U.S. banks with assets less than $1 billion treated (unregulated) liquidity and (regulated) capital as substitutes. Following exogenous shocks to their regulatory capital ratios, these banks shifted away from loans, loan commitments, and dividend payouts, actions that both repaired their capital ratios and enhanced their liquidity positions. We find little similar behavior at larger banks. We conclude that a minimum capital constraint naturally mitigates liquidity risk at community banks, justifying the exemption of these banks from the Basel III liquidity standards

We examine the effects of financial reporting regulation on firms’banking. Exploiting discontinuous public disclosure and auditing requirements assigned to otherwise similar small and medium-sized private firms, we document that financial reporting regulation reduces firms’ reliance on concentrated and local bank relationships and increases banks’ reliance on firms’ financial reporting, consistent with a shift in firms’ banking from relationship toward transactional approaches. Our evidence suggests that financial reporting regulation substitutes for banks’ information production role by burdening firms with the disclosure and auditing of their financial statements, consistent with institutional complementarities between reporting and banking systems

We examine the effects of financial reporting regulation on firms’ banking. Exploiting discontinuous public disclosure and auditing requirements assigned to otherwise similar small and medium-sized private firms, we document that financial reporting regulation reduces firms’ reliance on concentrated and local bank relationships and increases banks’ reliance on firms’ financial reporting, consistent with a shift in firms’ banking from relationship toward transactional approaches. Our evidence suggests that financial reporting regulation substitutes for banks’ information production role by burdening firms with the disclosure and auditing of their financial statements, consistent with institutional complementarities between reporting and banking systems. Received October 21, 2016; editorial decision September 15, 2017 by Editor Philip Strahan

I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state‐level requirements to report financial statements in local newspapers is associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because the passage of such rules threatens their private interests

I examine whether bank regulators and external auditors have conflicting effects on loan loss provision timeliness, an accounting choice associated with important economic consequences and a potential conflict between regulators and auditors. In the absence of the other group, auditors and strict regulators are each positively associated with timeliness. However, audits are negatively associated with timeliness when strict regulators are present, consistent with a conflict for which auditors are the dominating group as audited banks attain a similar level of timeliness regardless of the extent of regulatory scrutiny. Collectively, this suggests that regulators and auditors differentially influence loan loss provisions

This paper considers optimal executive pay regulations for banks that are too-big-to-fail. Theoretically, we map the consequences of a series of commonly-used pay schemes, describing their relative optimality and ultimate societal consequences. We argue that in a world of too-big-to-fail policy, simple equity-linked remuneration schemes maximise shareholder value by incentivising executives to choose excessively risky projects at the expense of the taxpayer. We find that paying the executive partly in debt fails to mitigate the project choice distortion when debt markets are informed. By contrast, both clawback rules and linking pay to interest rates can incentivise the executive to make socially optimal risk choices, but only if they are accompanied by appropriate restrictions on the curvature of pay with respect to the bank’s market value. Pay curvature can be generated by tools such as equity options and promotion policy. The policy implication is that unless regulators can enforce restrictions on pay curvature, bank shareholders can undermine the effectiveness of these pay regulations

Retail banking is a complex industry in which depository institutions bundle various services and may have market power. We use a recent regulation as a natural experiment to provide broad evidence about competition and the importance of bundling in retail banking. That regulation, which resulted from the Durbin Amendment to the Dodd–Frank Act, capped debit card interchange fees for banks with over 10 billion in assets. Using a difference-in-differences identification strategy, we document and quantify the resulting decline in interchange income for treated banks. We further find that treated banks offset more than 90% of the lost interchange income through increases in deposit fees for account holders. We argue that the ability to adjust deposit fees indicates (i) that treated banks have market power with respect to their account holders and (ii) strong complementarity between debit card transactions and deposit accounts. These results are robust when limiting the sample to banks near the asset threshold or using control banks with low direct competition with treated banks. Treated banks neither reduced costs nor strategically avoided the 10 billion threshold

We analyze the interaction among market competition, capital regulation, fixed regulatory compliance costs, and the portfolio and monitoring decisions of banks. We examine how the interplay among the effects of changes in the degree of competition and capital requirements regulation influence optimal bank choices and market outcomes. Furthermore, we evaluate how ratcheting up the Basel regulatory regime is likely to influence both the competitive structure of banking markets and the overall quality of bank loans. Higher capital requirements and increased fixed costs reduce the degree of competition in banking markets. The weight of these changes can fall more heavily on banks that choose to expend resources to monitor their loans to address loan losses