Bank regulation | EPFL Graph Search

Bank regulation is a form of government regulation which subjects banks to certain requirements, restrictions and guidelines, designed to create market transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. As regulation focusing on key factors in the financial markets, it forms one of the three components of financial law, the other two being case law and self-regulating market practices. Given the interconnectedness of the banking industry and the reliance that the national (and global) economy hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions. Another relevant example for the interconnectedness is that the law of financial industries or financial law focuses on the financial (banking), capital, and insurance markets. Supporters of such regulation often base their arguments on the "too big to fail" notion. This holds that many fi

Essays in Banking and Financial Regulation

Susanne Johanna Petronella Léonie Vissers

This thesis examines how banks choose their optimal capital structure and cash reserves in the presence of regulatory measures. The first chapter, titled Bank Capital Structure and Tail Risk, presents a bank capital structure model in which bank assets are subject to both diffusion and tail risk. Of these two types of risk, tail risk causes uninsured deposits to be risky, as the bank's asset value can unexpectedly fall below the value of deposits in case of default. The model shows that tail risk, rather than diffusion risk, is the main driver of the risk on deposits when the bank is unregulated and of the endogenous deposit insurance premium when the bank is regulated. Keeping total volatility constant, the model shows that a high tail risk component leads to higher credit spreads, default risk, and magnitude of bank losses in default than a high diffusion risk component.The second chapter, titled Bank Regulation and Market Discipline in the Presence of Risk-Taking Incentives, presents a bank capital structure model in which equity holders can increase asset risk once debt is in place. I study the effects of capital requirements and subsidized deposit insurance on the bank's privately optimal funding and operational risk level. The model predicts that there are synergetic effects of regulation and market discipline. When the regulator sets the capital charge and deposit insurance premium payments sufficiently high for a risky portfolio, the bank commits to the low-risk asset portfolio by setting a lower leverage ratio and substituting market debt for deposits. This market discipline effect disappears when the regulatory costs become too high. In the third chapter that is titled Dividend Restrictions and Asymmetric Information, we develop a dynamic model of a bank whose management has superior information about the impact of a pending shock to the bank's cash holdings and can signal the bank's type through its dividend policy. Banks that will be adversely affected by the shock have incentives to pool with unaffected banks to increase their market value. To avoid being mimicked, the unaffected banks can credibly signal via a more aggressive payout strategy. Dividend payout restrictions have the potential to prevent a separating equilibrium from forming. This leads to the bad type adopting a more aggressive payout policy with a higher risk of default but mitigates the distortion of the good type's policy. We identify a number of scenarios where this trade-off presents an opportunity for regulatory intervention and some where it does not.

EPFL2021

Credit Supply and the Macroeconomy

Abhik Mukherjee

The policy response to the recent financial crisis has broadly focused on two themes: 1) Increasing the banking sectorsâ resilience to future financial shocks: 2) Improving credit availability to households and firms via lowering both short and long-term interest rates and thereby affecting short-term output and inflation. This dissertation studies how banks and firms have responded to these policy measures. The dissertation comprises of three chapters. The first two analyze the impact of capital regulation on bank lending for two different jurisdictions - United States and Switzerland. The third evaluates the response of U.S. non-financial firms to lower interest rates. The first chapter is joint work with Luisa Lambertini. We estimate the impact of bank capital regulation on lending spreads. We use U.S. firm-level data on syndicated loans matched with Bank Holding Company (BHC) data for the lending banks in our panel regressions. We find that higher bank capital leads to an increase in the loan pricing. Further, we investigate if stress test failure under the Supervisory Capital Assessment Program and Comprehensive Capital Analysis and Review leads to higher loan spreads, since financial institutions that failed were required to raise capital in the short run. Using a difference-in-difference framework, we find: 1) BHCs that failed the stress tests increased their loan pricing; 2) Loan pricing is higher for all banks after the commencement of the stress tests. These findings suggest that greater regulatory oversight and higher capital requirements have made syndicated loans more costly for firms. The second chapter is joint work with Luisa Lambertini, Dan Wunderli and Robert Bichsel. We use confidential loan-by-loan data of Swiss banks to study the impact of higher capital requirements on lending. Our data allows us to trace the link between bank capital and new credit granted at the bank level. Additionally bank-specific variation of capital targets allows us to analyze how deviation from the regulatory capital target impacts loan pricing and volume. We find that tighter capital regulation has small but statistically significant short-term effects on loan pricing and growth. We do not find a permanent effect of higher capital ratios on loan growth. In the third chapter, I study the behavior of U.S. non-financial corporates after the recent financial crisis. I document an increase in the real debt holdings and correspondingly the book leverage for these firms. Controlling for firm and time fixed-effects, I find a higher long-term debt to asset ratio to be associated with lower capital expenditures and growth in fixed capital post-crisis. This is also true for financially unconstrained firms, as determined by the Whited-Wu index, vis-a-vis pre-crisis. Moreover, firms with a higher share of long-term debt after the crisis appear to have a greater likelihood of repurchasing shares and larger dollar payouts to equity holders. The evidence points to the fact that any increase in long-term debt has had an impact on firms' capital structure but no positive effect on real investment.

EPFL2016

Essays in Banking and Financial Regulation

Susanne Johanna Petronella Léonie Vissers

EPFL2021

Credit Supply and the Macroeconomy

Abhik Mukherjee

EPFL2016