Economics at your fingertips  

Bank Regulatory Reforms and Declining Diversity of Bank Credit Allocation

Takeo Hoshi () and Ke Wang
Additional contact information
Ke Wang: Federal Reserve Board

No CARF-F-506, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper addresses the concerns on correlated risks across banks that tightening regulation may have induced. Facing higher required capital ratio after the global financial crisis, a bank can reduce the risk-weighted assets by shifting its portfolios from asset classes with high risk-weights to asset classes with low risk-weights. This may reduce the risk exposures of individual banks, but may end up concentrating various banks’ assets to the same set of low risk assets, hence increase the joint default probability and systemic risk of the banking system. Using risk-weighted asset data in Form FFIEC101, reported by the U.S. banks that are allowed to use the advanced approach, we show banks’ average risk weights indeed declined since 2010, partly due to portfolio shifts in credit allocation. We measure the convergence in credit allocation by the cosine similarity of portfolio compositions for pairs of banks. We document that the average cosine similarity across the advanced approach banks rose monotonically and significantly since 2010, which coincides with a period of tightened capital regulations. Finally, we observe that the two prevailing systemic risk measures –SRISK and CoVaR –also show signs of convergence among banks during the same time period. We conclude that the capital regulation may have unintended consequences on systemic risk by encouraging herd behavior across regulated banks.

Pages: 19
Date: 2021-02
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by ().

Page updated 2021-10-24
Handle: RePEc:cfi:fseres:cf506