We empirically test competing theoretical arguments about the impact of common ownership on bank stability: the common ownership hypothesis, where banks decrease risk-taking by internalizing risk externalities on commonly held banks, and the diversification hypothesis, where banks increase risk-taking influenced by common owners who hold diversified portfolios and are less risk averse. Using data from the U.S. banking industry from 1991 to 2016, we find that banks with more common ownership linkages undertake lower risk, as predicted by the common ownership hypothesis. This relation is statistically significant and economically sizable, which is consistent across alternative measures of common ownership and bank risk and robust to potential endogeneity. Our study adds the financial stability perspective to the ongoing discussions on common ownership and antitrust regulations

This study examines the interplay between political influence and regulatory decision-making. Political influence is captured based on whether a bank is headquartered in a state where an elected official holds a chair position on a congressional committee related to the banking and financial services industry. Using data of US commercial banks over the period 2000–2015, we show that our measure of political influence reduces a bank's probability of receiving a formal regulatory enforcement action. Results are robust to the use of alternative model specifications and the sample restrictions. However, we find that various bank and environmental characteristics are important conditional factors

We build a simple model of banking in the presence of macroeconomic shocks where the comparative roles of private and public monitors can be analyzed. This model provides endogenous justifications for prudential regulation (capital requirements) and emergency liquidity assistance by the Central Bank (lender of last resort). We show that market discipline can be helpful, but does not solve the fundamental problem of regulatory forbearance. We propose some directions of reform of the regulatory system that could improve the management of banking crises

In this paper, we examine the role of political connections in mitigating the detrimental impact of policy uncertainty on banks. Our estimates show that banks are more cautious when facing policy uncertainty, but that the effect is partially alleviated when banks are politically connected. For an increase of one standard deviation in policy uncertainty, connected banks maintain a loss provision to loan volume ratio that is almost seven percent lower compared to their unconnected peers. These findings are robust to a geographical regression discontinuity setting, as well as to a placebo test. Lastly, the mitigating role of political connections is driven mainly by smaller banks and periods of stricter banking regulations

The 2023 banking turmoil highlighted how technological advancements have significantly accelerated the speed of bank runs. This paper investigates the impact of these faster bank runs on the effectiveness of policy interventions by interpreting them as a constraint on the relative speed of policy responses. Using a model of bank runs and ex-post policy responses, we examine how delays caused by this constraint affect financial fragility and welfare. We find that while delays exacerbate welfare loss by distorting allocations, they may also decrease fragility by making banks more cautious. We study the optimal level of structural delay, balancing the trade-off between distributional distortions and financial fragility. Furthermore, we extend this model to explore the roles of liquidity regulations and capital injections given such a delay. We show that regulation may be more desirable than a capital injection if the delay is substantial because the benefit of decreased fragility is particularly potent

We provide novel evidence on regulatory and supervisory practices around the world in the context of the global financial crisis, using data from a new World Bank survey covering 143 countries. Analyzing differences between crisis and non-crisis countries, we find that crisis countries had less stringent and more complex definitions of capital but exhibited lower actual capital ratios, faced fewer restrictions on non-bank activities, were less strict in the regulatory treatment of bad loans, were less able to demand banks to adjust their equity, provisions or compensation schemes, and had greater disclosure requirements but weaker incentives for private agents to monitor banks. Comparing regulatory and supervisory practices before and after the global crisis, there is evidence of few changes. While capital ratios increased, bank governance and resolution regimes were strengthened, private sector incentives to monitor banks deteriorated

I develop a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on banks’ financial decisions and the implications for the real sector. I model an occasionally binding capital requirement constraint and analyze its costs and benefits. This friction means that the banks refrain from valuable lending. At the same time, capital requirements provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations and raise welfare. I also show that switching to a countercyclical capital requirement regime can help reduce volatility and raise welfare. Finally, by means of the welfare analysis, I also obtain the optimal level of capital requirement

This paper examines the impact of bank opacity on European financial stability. Based on a panel dataset of listed European banks covering the period 2002–2018, I find that bank opacity has a significant influence on the institution-specific contribution to the ∆Conditional Value at Risk and Marginal Expected Shortfall. The enforcement mechanism and the policies introduced by accounting standard setters and regulators for the risk disclosure of banks have a positive impact on the reduction of systemic risk. Both the risk reporting in accordance with IFRS 7 and the measures introduced by the Basel Committee in the form of the Basel Pillar 3 regulation led to an increase in transparency and thus an improvement in financial market stability. As an independent enforcement mechanism, the country-specific strength of the external auditing profession plays a significant role in fostering stability. The results are robust, by using both alternative opacity measures and instrumental-variable estimations (2SLS) to control for potential endogeneity

We study retail deposit withdrawals from commercial banks that were differentially exposed to distress during the 2007–2009 financial crisis. We show that the propensity of clients to withdraw deposits increases with the severity of bank distress. However, an exclusive pre-crisis bank-client relationship eliminates withdrawal risk. The mechanism through which strong bank-client relationships mitigate withdrawal risk relates to the transaction costs of switching accounts rather than informational rents or differentiated services. Our findings provide empirical support to the Basel III liquidity regulations that emphasize the role of well-established client relationships for the stability of bank funding

This paper analyzes financial contagion in a banking system where banks are linked to each other by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic liquidity shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the complete interbank network, in which each bank borrows evenly from all the others, displays the usual robust-yet-fragile property. However, in the more general case of heterogeneous common asset holdings the complete interbank network is less resilient than other incomplete networks but not necessarily the most fragile. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation