Quantifying and explaining parameter heterogeneity in the capital regulation-bank risk nexus
Manthos Delis (),
Kien Tran () and
MPRA Paper from University Library of Munich, Germany
By examining the impact of capital regulation on bank risk-taking using a local estimation technique, we are able to quantify the heterogeneous response of banks towards this type of regulation in banking sectors of western-type economies. Subsequently, using this information on the bank-level responses to capital regulation, we examine the sources of heterogeneity. The findings suggest that the impact of capital regulation on bank risk is very heterogeneous across banks and the sources of this heterogeneity can be traced into both bank and industry characteristics, as well as into the macroeconomic conditions. Therefore, the present analysis has important implications on the way bank regulation is conducted, as it suggests that common capital regulatory umbrellas may not be sufficient to promote financial stability. On the basis of our findings, we contend that Basel guidelines may have to be reoriented towards more flexible, country-specific policy proposals that focus on the restraint of excess risk-taking by banks.
Keywords: Capital regulation; risk-taking of banks; local generalized method of moments (search for similar items in EconPapers)
JEL-codes: C14 G38 G32 C33 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-eff, nep-reg and nep-rmg
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Journal Article: Quantifying and explaining parameter heterogeneity in the capital regulation-bank risk nexus (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:18526
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