The more the merrier? Evidence on the value of multiple requirements in bank regulation

Marcus Buckmann, Paula Gallego Marquez, Mariana Gimpelewicz, Sujit Kapadia and Katie Rismanchi

Journal of Banking & Finance, 2023, vol. 149, issue C

Abstract: This paper assesses the value of multiple requirements in bank regulation using a novel empirical rule-based methodology. Exploiting two datasets, we apply simple threshold-based rules to assess how different capital and liquidity ratios individually and in combination might have identified banks that failed in the global financial crisis and European sovereign debt crisis. Our results support the case for a small portfolio of different regulatory metrics, calibrated holistically. A portfolio of a leverage ratio, a risk-weighted capital ratio and a liquidity ratio such as the NSFR correctly identifies a high proportion of failing banks with fewer false alarms than any of these metrics individually – and at less stringent calibrations. The relative usefulness of individual metrics also varies across different crises and regulatory regimes, highlighting how a portfolio approach may be more robust. Further, we show that market-based capitalisation measures and loan-to-deposit ratios can provide complementary value in monitoring banks.

Keywords: Banking regulation; Basel III; Bank failure; Global financial crisis; Market-based metrics; Regulatory complexity (search for similar items in EconPapers)
JEL-codes: G01 G18 G21 G28 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426622003338

DOI: 10.1016/j.jbankfin.2022.106753

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