We examine whether U.S. banks subject to the Liquidity Coverage Ratio (LCR) reduce lending (an unintended consequence) and/or become more resilient to liquidity shocks, as intended by regulators. We find that LCR banks tighten lending standards, and reduce liquidity creation that occurs mainly through lower lending relative to non-LCR banks. However, covered banks also contribute less to fire-sale externalities relative to exempt banks. For LCR banks, we estimate that the total after-tax benefits of reduced fire-sale risk (net of the costs associated with foregone lending) exceed $50 billion from 2013Q2 to 2017, mostly accruing to the largest LCR banks. Non-LCR regulations enacted during our sample period cannot fully account for these findings. For the banking sector as a whole, lending migrates to smaller, non-LCR banks so that lending shares increase but fire-sale risk does not decrease. Our results highlight the trade-off between liquidity creation and resiliency arising from liquidity regulations that underlie the debate on whether the LCR should be extended following the banking crisis of March 2023

This paper studies whether and how environmental, social, and governance (ESG) disclosure regulations imposed on banks generate transmission effects along the lending channel. I use a setting of U.S. firms borrowing from non‐U.S. banks and exploit the staggered adoption of ESG disclosure regulations in banks’ home countries. I find that exposed borrowers of affected banks improve their environmental and social (E&S) performance following the disclosure mandate. Consistent with banks enhancing both their engagement and selection activities, affected banks impose more environmental action covenants in loan contracts, and they are more likely to terminate a borrower with bad E&S records following the regulation. Further evidence shows that the transmission effects are stronger when a disclosure regulation is well‐enforced (as indicated by a greater increase in banks’ disclosure) and among borrowers with greater switching costs. Collectively, the findings document the role of lending relationships in transmitting the real effect of ESG disclosure regulations from banks to borrowing firms

Postcrisis bank regulations raised market-making costs for bank-affiliated dealers. We show that this can, somewhat surprisingly, improve overall investor welfare and reduce average transaction costs despite the increased cost of immediacy. Bank dealers in OTC markets optimize between two parallel trading mechanisms: market making and matchmaking. Bank regulations that increase market-making costs change the market structure by intensifying competitive pressure from nonbank dealers and incentivizing bank dealers to shift their business activities toward matchmaking. Thus, postcrisis bank regulations have the (unintended) benefit of replacing costly bank balance sheets with a more efficient form of financial intermediation

The regulation that caps executives’ variable compensation, as part of the Capital Requirements Directive IV of 2013, likely affected executive turnover, compensation design, and risk-taking in EU banking. The current study identifies significantly higher average turnover rates but also finds that they are driven by CEOs at poorly performing banks. Banks indemnified their executives by off-setting the bonus cap with higher fixed compensation. Although our evidence is only suggestive, we do not find any reduction in risk-taking at the bank level, one purported aim of the regulation

This paper assesses the value of multiple requirements in bank regulation using a novel empirical rule-based methodology. Exploiting two datasets, we apply simple threshold-based rules to assess how different capital and liquidity ratios individually and in combination might have identified banks that failed in the global financial crisis and European sovereign debt crisis. Our results support the case for a small portfolio of different regulatory metrics, calibrated holistically. A portfolio of a leverage ratio, a risk-weighted capital ratio and a liquidity ratio such as the NSFR correctly identifies a high proportion of failing banks with fewer false alarms than any of these metrics individually – and at less stringent calibrations. The relative usefulness of individual metrics also varies across different crises and regulatory regimes, highlighting how a portfolio approach may be more robust. Further, we show that market-based capitalisation measures and loan-to-deposit ratios can provide complementary value in monitoring banks

We examine how banks’ cross-border lending reacts to changes in the intensity of liquidity regulation using a new dataset on the UK’s Individual Liquidity Guidance. An increase in requirements reduces banks’ cross-border lending growth to banks and non-banks. But banks’ business models determine how they adjust: banks with higher deposit shares, such as those with UK retail operations, protect lending more; banks also preserve lending to countries they do most business, cutting elsewhere; foreign subsidiaries from countries not eligible to issue High Quality Liquid Assets (HQLA) show the strongest reduction in lending; in contrast, subsidiaries from HQLA-issuing countries cut intragroup lending

The literature demonstrates numerous consequences of bank geographic deregulation, but neglects bank capital structure – critical to performance, resilience, and prudential regulation/supervision. We supply first-time evidence on geographic deregulation effects on bank capital. We also distinguish and test two novel mechanisms through which geographic deregulation may affect bank behavior. The competitive defense and competitive offense mechanisms differentiate deregulation effects in increasing external competitive pressures on banks versus expanding banks’ capacity to compete externally. We find statistically and economically significant evidence of geographic deregulation effects on two bank capital management tools – target capital ratios and speeds of adjustment to these targets – yielding higher targets and faster adjustment. Findings are robust to addressing identification concerns using dynamic panel methodology, a gravity-deregulation approach, and time-varying bank-specific instruments. The data also support both the competitive defense and competitive offense mechanisms, suggesting future research and policy applications of these mechanisms to banking and more generally

We develop a model in which accounting information and prudential regulation interact to affect banks’ incentives to originate loans. Prudential regulators impose capital requirements to prevent banks from taking excessive risk. However, regulators cannot commit to ex ante efficient intervention and, instead, respond to ex post accounting information. We show that capital requirements and accounting measurement are substitutes when considered separately. By contrast, when considered jointly, accounting measurement and capital requirements are complementary tools that affect the level and efficiency of credit decisions. Comparative statics link capital requirements, quality of accounting information, and regulatory intervention to credit market conditions. An upshot of our analysis is that by appropriately optimizing the information from expected loss models, prudential regulators may design looser capital requirements to spur more bank lending

The focus of this paper is whether the Securities and Exchange Commission's Regulation SHO strengthens or weakens the effect of short-selling threats on banks’ risk-taking. The evidence shows that pilot banks with looser constraints on short-selling increased their risk-taking during the financial crisis of 2007–2009. The reason is that short-selling threats improved the information environment and mitigated the agency problems of banks during the pilot program that led to greater risk-taking by pilot banks. Additionally, this effect is mainly driven by pilot banks with poor corporate governance, or high information asymmetry. Overall, our paper provides novel evidence that the disciplinary role of short-sellers had a positive effect on bank risk-taking during the financial crisis

Regulation of the market for structured retail investment products in Germany switched from voluntary self-regulation to government regulation. In 2014, issuers of structured retail products subscribed to the “Fairness Code” as an instrument of self-regulation. A key measure of the Fairness Code was the mandatory disclosure of an “Issuer Estimated Value” (IEV) to provide information about hidden investment costs for the retail customer. In 2018, this measure became obsolete, since the new EU regulation on Packaged Retail and Insurance-Based Investment Products (PRIIPs) prescribed a direct disclosure of investment costs. We compare these instruments of voluntary self-regulation and government regulation and analyze issuers’ disclosure policies under both regimes. The new regulation effectively forces issuers to report actual costs correctly. In contrast, the self-regulated IEV was of limited use for retail investors, because (i) its definition was ambiguous, and (ii) issuers exploited this opaqueness by reporting disproportionately high IEVs. Hence, under voluntary self-regulation issuers professed transparency and fairness, but continued to hide costs in their prices