THE UNINTENDED CONSEQUENCES OF MACROPRUDENTIAL REGULATION IN INSURANCE AND BANKING: ENDOGENOUS FINANCIAL SYSTEM INSTABILITY INDUCED BY REGULATORY CAPITAL STANDARDS

Periklis Thivaios () and Laura Nuñez-Letamendia ()
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Periklis Thivaios: True North Partners LLP, https://www.unic.ac.cy/thivaios-periklis/
Laura Nuñez-Letamendia: IE University, IE Business School, https://www.linkedin.com/in/laura-nu%C3%B1ez-letamendia/?originalSubdomain=es
Authors registered in the RePEc Author Service: Laura Marta Nuñez Letamendia ()

Journal of Financial Transformation, 2021, vol. 54, 200-213

Abstract: Unlike microprudential regulation that focuses on the stability of individual institutions, macroprudential regulation focuses on the stability of the financial system as a whole. However, despite the increased interest in a system-wide lens, our empirical research indicates that the design of the Solvency II and Basel II/III frameworks, while intended to strengthen the stability of each sector individually, may be the source of endogenous destabilizing effects across the financial system, due to incentives for increased asset concentration and capital standard procyclicality. The support for the capital arbitraging hypothesis was weaker.

Keywords: Banks; Insurance; Regulation; Capital Regulatory; Macroeconomic Policy; Arbitrage; Cyclicality; Financial Asset Concentration; Basel; Solvency (search for similar items in EconPapers)
JEL-codes: G21 G22 G28 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1676

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