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Bank regulation and systemic risk: cross country evidence

Bank regulation and systemic risk: cross country evidence
Bank regulation and systemic risk: cross country evidence

Using data for banks from 65 countries for the period 2001–2013, we investigate the impact of bank regulation and supervision on individual banks’ systemic risk. Our cross-country empirical findings show that bank activity restriction, initial capital stringency and prompt corrective action are all positively related to systemic risk, measured by Marginal Expected Shortfall. We use the staggered timing of the implementation of Basel II regulation across countries as an exogenous event and use latitude for instrumental variable analysis to alleviate the endogeneity concern. Our results also hold for various robustness tests. We further find that the level of equity banks can alleviate such effect, while bank size is likely to enhance the effect, supporting our conjecture that the impact of bank regulation and supervision on systemic risk is through bank’s capital shortfall. Our results do not argue against bank regulation, but rather focus on the design and implementation of regulation.

Activity restrictions, Bank regulation and supervision, Capital shortfall, Systemic risk
0924-865X
353-387
Chen, Lei
a5e9ef91-b122-4983-8a6b-311dcc782e95
Li, Hui
27f28b65-412a-440d-9c0f-b6bb32432a9e
Liu, Hong
d393b487-c876-4e8d-8087-ac56a4a37c8e
Zhou, Yue
1f8cb3b9-0e34-4dd9-862c-e1c7e238d4c7
Chen, Lei
a5e9ef91-b122-4983-8a6b-311dcc782e95
Li, Hui
27f28b65-412a-440d-9c0f-b6bb32432a9e
Liu, Hong
d393b487-c876-4e8d-8087-ac56a4a37c8e
Zhou, Yue
1f8cb3b9-0e34-4dd9-862c-e1c7e238d4c7

Chen, Lei, Li, Hui, Liu, Hong and Zhou, Yue (2021) Bank regulation and systemic risk: cross country evidence. Review of Quantitative Finance and Accounting, 57 (1), 353-387. (doi:10.1007/s11156-020-00947-0).

Record type: Article

Abstract

Using data for banks from 65 countries for the period 2001–2013, we investigate the impact of bank regulation and supervision on individual banks’ systemic risk. Our cross-country empirical findings show that bank activity restriction, initial capital stringency and prompt corrective action are all positively related to systemic risk, measured by Marginal Expected Shortfall. We use the staggered timing of the implementation of Basel II regulation across countries as an exogenous event and use latitude for instrumental variable analysis to alleviate the endogeneity concern. Our results also hold for various robustness tests. We further find that the level of equity banks can alleviate such effect, while bank size is likely to enhance the effect, supporting our conjecture that the impact of bank regulation and supervision on systemic risk is through bank’s capital shortfall. Our results do not argue against bank regulation, but rather focus on the design and implementation of regulation.

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Accepted/In Press date: 13 November 2020
Published date: July 2021
Additional Information: Publisher Copyright: © 2020, The Author(s). Copyright: Copyright 2021 Elsevier B.V., All rights reserved.
Keywords: Activity restrictions, Bank regulation and supervision, Capital shortfall, Systemic risk

Identifiers

Local EPrints ID: 445411
URI: http://eprints.soton.ac.uk/id/eprint/445411
ISSN: 0924-865X
PURE UUID: c1c6d84a-b9e7-4051-b795-4a46ec59b498
ORCID for Yue Zhou: ORCID iD orcid.org/0000-0001-6544-2078

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Date deposited: 08 Dec 2020 17:30
Last modified: 17 Mar 2024 06:08

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Contributors

Author: Lei Chen
Author: Hui Li
Author: Hong Liu
Author: Yue Zhou ORCID iD

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