This paper investigates whether inclusive banking can boost bank-level performance, using an international sample of 1,740 banks over the period 2004-2015. We find that there is a significant positive association between financial inclusion and bank efficiency. Greater financial inclusion helps banks in reducing the volatility of their deposit-funding share as it provides more stable long-term funds for banks, while also mitigating the adverse effects of their return volatility. The association is stronger in countries with limited restrictions on banking activities or more capital regulation stringency as the deposit channel enables greater flow of low-cost funds for high-return investments. The results are robust to instrumental variable analysis, multiple dimensions of financial inclusion (supply, demand, and pro-access policy), and a difference-in-differences estimator that exploits cross-country and temporal variations in actively promoting an inclusive agenda, further confirming that inclusive financial development can be beneficial for banks

We study the economic consequences of mandates that require bank auditors to report to bank regulators. Based on survey responses from the European Central Bank, all 28 national bank regulators within the European Union, and a review of national banking regulations, we create a novel dataset on these mandates. Exploiting the cross-sectional and time-series variation in these mandates, we find evidence that auditor reporting to bank regulators reduces bank riskiness, as measured by counterparty risk and credit spreads. We also observe a decline in problem loans and risk-weighted assets, as well as improvements in timeliness of loan loss provisions. Additional analyses suggest that mandated auditor reporting increases the effectiveness of supervisory and monitoring efforts and improves market discipline of banks. However, mandated auditor reporting comes with costs: it reduces future lending growth, risky lending, and profitability, and increases audit fees paid by shareholders

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

This paper examines how the capital structure of non-financial firms is affected by international variation in bank regulation. A concise model yields an estimating equation that relates a firm's capital structure to bank regulatory variables and their interactions with the tax rate reflecting the tax deductibility of interest. We identify an effect of bank regulation on leverage by considering establishments of the same multinational firm located in different countries. Our results indicate that capital regulation stringency and official supervisory power are negatively related to firm leverage, while restrictions on non-lending activities and on financial conglomerates vary positively with firm leverage. High tax rates mitigate these effects

This paper develops a model of regulated Brownian motion with an endogenous profit term to analyze the role of regulatory credibility on the stability and productivity of the banking system. We show that when regulatory intervention is perfect and costless, the volatility of the system can be substantially reduced with no loss of productivity. In fact, perfect credibility can actually reduce the volatility of intrinsically risky banking systems below the volatility of intrinsically less risky systems as banks anticipate intervention and mitigate their investment behaviour accordingly. However, when the credibility of the regime is weakened because of increased uncertainty stemming from regulation, such as random costs or imperfect timing of regulatory intervention, both the stability and productivity of the financial system are impaired. Importantly, we find that in the presence of regulatory costs and imperfect credibility, there is no universal optimal intervention policy rule. The optimal regulatory system depends on the regulator’s level of absolute risk aversion

Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions

We examine the optimal design of and interaction between capital and liquidity regulations. Banks, not internalizing fire sale externalities, overinvest in risky assets and underinvest in liquid assets in the competitive equilibrium. Capital requirements can alleviate the inefficiency, but banks respond by decreasing their liquidity ratios. When capital requirements are the only available tool, the regulator tightens them to offset banks’ lower liquidity ratios, leading to fewer risky assets and less liquidity compared with the second best. Macroprudential liquidity requirements that complement capital regulations implement the second best, improve financial stability, and allow for more investment in risky assets

This article studies the optimal design of bank capital regulations when capital markets are subject to adverse selection. I show how the implementation of capital requirements can eliminate the information frictions that make raising capital costly by screening banks to reveal their private information to the market. The optimal regulations induce information revelation via recapitalization programs when the banking sector is weak and pool the banks’ private information via uniform capital requirements otherwise. Optimal capital requirements are linked to the securities issued to meet them, demonstrating potential welfare gains from incorporating more and less informationally sensitive securities into the design of capital regulations. Finally, the analysis generates insights into the joint design of equity capital requirements and additional tier 1 capital securities

Early warning systems (EWS) for banking crises generally omit bank capital, bank liquidity and property prices. Most work on EWS has been for global samples dominated by emerging market crises where time series data on bank capital adequacy and property prices are typically absent. We estimate logit crisis models for OECD countries, finding strong effects from capital adequacy and liquidity ratios as well as property prices, and can exclude traditional variables. Higher capital adequacy and liquidity ratios have a marked effect on the crisis probabilities, implying long-run benefits to offset some of the costs that such regulations may impose

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