This paper studies the effect of reporting regulation on private firms' bank credit and its economic consequences. I exploit the Spanish institutional setting, which provides a unique combination of confidential loan data and regulatory features that generate quasi‐exogenous variation in reporting regulation. Using a regression discontinuity design, I find that firms subject to incremental reporting regulation obtain more bank credit primarily through cash flow–based lending, term loans, and long‐term debt, without higher interest rates. These findings are explained by stronger banking competition and greater reliance on financial statement data. However, firms do not expand their net financial position, as bank credit substitutes for other liabilities, and exhibit weaker performance consistent with the costs of reporting regulation. This evidence from a different setting offers new insights into how reporting regulation influences credit contracting for private firms and strengthens the empirical basis for policy‐making

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

We argue that heightened regulation on large banks contributed to the rise in fragility of smaller banks revealed by the 2023 regional bank crisis. In 2018, regulators restricted Wells Fargo, the third largest U.S. bank, from growing its total assets. We estimate this asset cap led Wells Fargo to give up deposits amounting to 2.2% of aggregate bank deposits. These deposits, primarily uninsured, were reallocated to banks geographically proximate to Wells Fargo, including smaller, less regulated banks. In turn, these banks experienced higher deposit outflows once monetary tightening commenced and saw their stock prices plummet during the 2023 stress

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

Regulators condition bank capital on risk but struggle to measure risk accurately. Capital requirements thus rely on inputs from banks’ internal risk models, and banks have discretion over modeling choices. Using novel hand-collected data we show that reported bank risk varies systematically with simulation method, holding period, and historical data size. Hence, modeling choices can be a significant channel of underreporting of risk. Consistent with this presumption we find that less-capitalized banks tend to choose less conservative methods. Moreover, banks using a softer simulation method display higher actual market risk, while reporting lower market risk to regulators

Nonbank financial intermediaries (NBFIs) have grown significantly relative to banks. We argue that this growth reflects a transformation of the activities and risks of banks and NBFIs, driven at least in part by changes in bank regulation. We document through new regulatory data, case studies, and empirical analyses that banks remain special as providers of both routine and emergency liquidity to NBFIs and that the sectors have become increasingly interdependent. We discuss some potential regulatory responses, including considering the two sectors holistically and exploring new ways to internalize the costs of systemic risk arising from bank-NBFI interconnectedness

Traditional and shadow banks interacted in similar ways in the 2007 and COVID-19 crises, when both assets and liabilities flew out of shadow banks and into traditional banks. We explain these facts in a model of the coexistence of traditional and shadow banks in which liabilities and assets flow from the former to the latter in good times, avoiding regulation, and move the other way in a crisis, alleviating fire sales. The model sheds light on how regulations for traditional banks have (unintended) consequences on the shadow banking sector