The effect of political institutions on the interplay between banking regulation and banks’ risk

Tiago M. Dutra (), João C. A. Teixeira () and José Carlos Dias ()
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Tiago M. Dutra: University of the Azores
João C. A. Teixeira: University of the Azores
José Carlos Dias: Business Research Unit (BRU-IUL)

Journal of Banking Regulation, 2024, vol. 25, issue 2, No 6, 179-196

Abstract: Abstract This paper examines whether the influence of banking regulation on banks’ risk is channeled through the quality of political institutions. As banking regulatory factors, we consider capital stringency, activity restrictions and supervisory power. The overall effect of banking regulation on banks’ risk is conditional on the quality of political institutions. Activity restrictions and capital stringency have a statistically significant positive effect on banks’ risk. This effect is mitigated by better political institutions. In contrast, stringent supervisory power tends to reduce banks’ risk, and better political institutions reinforce this effect. The results are robust for alternative estimation methods and risk measures.

Keywords: Bank risk; Banking regulation; Political institutions (search for similar items in EconPapers)
JEL-codes: G10 G21 G28 G32 G38 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41261-023-00225-8

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