The more the merrier? Evidence from the global financial crisis on the value of multiple requirements in bank regulation

Marcus Buckmann (), Paula Gallego Marquez (), Mariana Gimpelewicz (), Sujit Kapadia and Katie Rismanchi
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Marcus Buckmann: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Paula Gallego Marquez: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Mariana Gimpelewicz: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Katie Rismanchi: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 905, Bank of England working papers from Bank of England

Abstract: This paper assesses the value of multiple requirements in bank regulation using a novel empirical rule‑based methodology. Exploiting a dataset of capital and liquidity ratios for a sample of global banks in 2005 and 2006, we apply simple threshold-based rules to assess how different regulations individually and in combination might have identified banks that subsequently failed during the global financial crisis. Our results generally support the case for a small portfolio of different regulatory metrics. Under the objective of correctly identifying a high proportion of banks which subsequently failed, we find that a portfolio of a leverage ratio, a risk-weighted capital ratio, and a net stable funding ratio yields fewer false alarms than any of these metrics individually – and at less stringent calibrations of each individual regulatory metric. We also discuss how these results apply in different robustness exercises, including out-of-sample evaluations. Finally, we consider the potential role of market-based measures of bank capitalisation, showing that they provide complementary value to their accounting-based counterparts.

Keywords: Banking regulation; Basel III; bank failure; global financial crisis; marketbased metrics; regulatory complexity (search for similar items in EconPapers)
JEL-codes: G01 G18 G21 G28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2021-01-29
New Economics Papers: this item is included in nep-ban, nep-cba, nep-isf and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0905

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