Asymmetric effects of regulatory quality in bank risk-taking: the moderation effect of long-term interest rates

Paula Ortega Perals, Fabrizio Maturo, Salvador Cruz Rambaud and Javier Sánchez García

Journal of Financial Regulation and Compliance, 2025, vol. 34, issue 3, 438-465

Abstract: PurposeThis paper aims to examine the effect of regulatory quality on bank risk-taking, with a particular focus on the moderating role of long-term interest rates.Design/methodology/approachThe study covers 26 European countries over the period from 2005–2021.FindingsThe system generalized method of moments and quantile regression approaches indicate that regulatory quality affects bank risk-taking when combined with the influence of long-term interest rates, thereby confirming the moderating role of interest rates.Research limitations/implicationsData constraints exclude some EU countries, and results may not generalize beyond the 2005–2021 period.Originality/valueThe main contribution of the paper is two-fold. First, it demonstrates the effect of the rule of law on different levels of bank risk-taking regarding the quantile regression. Thus, this paper aids policymakers in managing their restrictions and regulations according to the level of bank risk. Second, it complements the recent literature on this topic by considering the interaction between the rule of law and long-term interest rates, thus broadening the research on the link between monetary and regulatory policy in European countries. Consequently, policymakers should coordinate monetary and regulatory policies, as their interaction critically shapes bank risk. In addition, risk-tiered regulations are recommended, as uniform approaches may be ineffective across diverse banking environments.

Keywords: Financial risk; Government effectiveness; Long-term interest rates; Generalized method of moments; Quantile regression (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-04-2025-0075

DOI: 10.1108/JFRC-04-2025-0075

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