Banks play a central role in the financial system and benefit the real economy by managing risk, and providing finance to households, small and medium-sized enterprises, large corporates and governments. However, their complexity, opacity and interconnectedness can elevate bank-level and systemic risks, posing dangers to the financial system and real economy. This was evident during the global financial crisis where taxpayer funded bailouts were used to rescue ailing banks, which in turn led to an overhaul of regulation and supervision. Consequently, safeguarding bank stability and addressing systemic risks via well designed regulations is essential for ensuring economic resilience and societal well-being. This study uses a quasi-natural experimental research design in the form of the Dutch Liquidity Balance Rule (LBR) to evaluate the impacts of liquidity regulation on bank-level stability and systemic risk. Our findings show that following the introduction of liquidity regulation, the stability of Dutch banks increases significantly relative to counterparts in neighbouring countries unaffected by the regulation. The observed reduction in risk stems from improved capitalization and reduced leverage, which contribute to greater financial stability. Systemic risk also decreases. Our findings have relevance beyond our research setting for policymakers tasked with implementing and monitoring the impacts of similar forms of liquidity regulation (such as bank liquidity coverage ratios) post global financial crisis

We evaluate the joint impact of structural liquidity regulation and unconventional monetary policy on Eurozone banks’ lending. Using an extensive bank-level quarterly dataset from 2008 to 2020, we study the introduction of the Net Stable Funding Ratio (NSFR) under Basel III and the European Central Bank’s Longer-Term Refinancing Operations (LTROs) and Targeted LTROs (TLTROs). We find that while the NSFR had no effect on aggregate lending, it led to an increase in short-term lending and a reduction in long-term lending, consistent with lower maturity transformation. LTRO participation is associated with higher medium- and long-term lending, and our results indicate that this effect is conditional on banks’ structural liquidity positions: banks with rising NSFRs were able to use LTRO and TLTRO funding to sustain long-term credit supply. These findings suggest that central bank liquidity interventions can mitigate the adjustment costs of tighter liquidity regulation during the transition period, enabling banks close to regulatory compliance to maintain longer-maturity lending

A large literature at the intersection of economics and finance offers prescriptions for regulating banks to increase financial stability.This literature abstracts from the discretion that accounting standards give banks over financial reporting, creating a gap between the information assumed to be available to regulators in models of optimal regulation and the information available to regulators in reality.We bridge insights from the economics, finance, and accounting literatures to synthesize knowledge about the design and implementation of bank regulation and identify areas where more work is needed.We present a simple framework for organizing the relevant ideas, namely the externalities that motivate bank regulation, the rationales for allowing accounting discretion, and the use of discretion to circumvent regulation.Our takeaway from reviewing work in these areas is that academic studies of bank regulation and accounting discretion require a more unified approach to design optimal policy for the real world

We study the impact of stricter and more harmonized banking regulation along the income distribution using household survey data for 25 EU countries. Exploiting country-level heterogeneity in the implementation of European Banking Union directives allows us to control for confounders and identify effects. Our results show that these regulatory reforms aimed at increasing financial system resilience affect households heterogeneously and result in a widening of the income distribution. These results are dependent on a country’s ex-ante regulatory stringency, and more pronounced in countries with stronger bank dependence. Furthermore, we find that more stringent regulation reduces income growth for low-income households primarily due to exits from employment, whereas affluent households tend to experience increased growth rates for employee and self-employed income

This article studies the disclosure of stress test results by a regulator who is privately informed about bank health when she chooses the stress scenario. I show that the regulator’s choice of the stress scenario depends on how heterogeneous health is across banks. There can be fewer runs than under transparency. However, there are more runs than when the regulator chooses the scenario before becoming informed, highlighting a time-inconsistency problem. Moreover, disclosure can become a source of informational contagion, as changes in the health of one bank affect beliefs about other banks. The model explains the empirical puzzle that a bank’s share price can fall even though it passes the stress test

Bank capital requirements are based on book values, which are slow to reflect losses. In this article, we develop a dynamic model of banks to study the interaction of regulation and delayed accounting. Our model explains four stylized facts: book and market values diverge during crises, the market-to-book ratio predicts future profitability, book leverage constraints rarely bind strictly even as market leverage fans out during crises, and banks delever gradually after net-worth shocks. We show how delayed accounting can allow the regulator to achieve better outcomes than immediate (mark-to-market) accounting. In an estimated version of the model, the optimal regulation couples faster loan-loss recognition with a modest relaxation of the book leverage constraint

Some bank regulators require that performance bonuses for risk managers (RMs) and for employees in front offices (FOs) be linked to distinct performance metrics, as correlated pay incentives could lead RMs to rubber-stamp risky investments. We theoretically show that a positive correlation between FOs and RMs is optimal for banks, but can be socially excessive in leveraged institutions. Using data from German bank employees, we show empirically that incentive pay is indeed positively correlated between RMs and FOs. Consistent with our predictions, bonus correlations are higher in banks with higher leverage and weaker performance during the Great Financial Crisis

This paper examines whether climate risk affects the dynamics of banks’ regulatory capital adjustments, based on a large panel of European banks over the 2006–2021 period. Using a dynamic partial adjustment model, we find that climate-exposed banks hold higher capital adequacy ratios and adjust faster toward their optimal capital structure, particularly when exposed to transition risk and post-COP21. Climate risk also induces asymmetric adjustment behaviours. Deleveraging occurs through risk-weighted asset reallocation toward safer exposures, without asset liquidation or lending cuts. While leveraging operates through risk-weighted asset expansion, without reducing equity growth. However, pre-COP21, deleveraging is primarily achieved through lending contraction, whereas leveraging relies mainly on asset expansion. Our findings highlight the policy relevance of climate risk for prudential supervision and bank capital regulation

This study analyzes the evolution of climate-risk discourse in banking using 4,887 news articles (2008–2024) collected from ProQuest. We apply Natural Language Processing and add two novel layers: (i) an event-alignment analysis that links coverage dynamics to dated policy and supervisory milestones, and (ii) a discourse-network analysis connecting banks and regulators. We document a marked post-2020 shift, with ESG emerging as the dominant framing (7,860 mentions) alongside persistent geographic asymmetries (U.S.-led coverage) and uneven sectoral engagement (Risk Management highest salience; Fintech lowest). Sentiment skews positive (≈4,000 positive vs. ≈1,500 negative), and topic modeling identifies eight stable thematic clusters spanning operations, ratings, ESG assessment, disclosures, and market instruments. Event alignment shows media attention is typically anticipatory (median peak two months before an anchor), with COP26 producing a sustained level shift (+100% within a ±6-month window) and the Bank of England’s CBES results generating the largest single spike (210 articles), whereas some 2022 rule-making announcements (e.g., SEC climate-disclosure proposal) exhibit sharper but less durable attention. The discourse network centers on two regulatory hubs (the Federal Reserve and the ECB) with key banks (e.g., Citigroup, JPMorgan, UBS) bridging into supervisory narratives. Collectively, the findings show climate risk becoming embedded in core banking practice while revealing structural, regional, and functional asymmetries that matter for policy design and implementation. • Provides the first longitudinal NLP-based analysis of climate risk discourse in the banking sector • Reveals how climate risk integration in banking has evolved across regulatory, operational, and market dimensions • Identifies distinct thematic domains shaping climate risk narratives in banking over time • Shows that climate risk discourse is predominantly anticipatory around major policy and supervisory milestones • Maps the institutional structure of climate risk governance by linking banks and regulators within a discourse network

We study how disclosures affect banks’ leverage and risk. Banks screen borrowers and originate loans, partially financed using insured deposits. The possibility to sell loans before they mature incentivizes banks to lever up using uninsured short-term debt to dilute insured deposits. If markets are opaque, good loans trade at a discount, which limits banks’ use of short-term debt. If markets are transparent, prices compound information contained in disclosures, which leads banks to issue more short-term debt to further dilute insured deposits. We identify conditions under which the increase in leverage caused by disclosures reduces banks’ screening incentives. Our analysis has important implications for prudential regulation, including minimum regulatory capital requirements and leverage-based deposit insurance premiums