Quantifying and Explaining Parameter Heterogeneity in the Capital Regulation-Bank Risk Nexus

Posted: 22 May 2009 Last revised: 30 Jul 2012

See all articles by Manthos D. Delis

Manthos D. Delis

Audencia Business School

Kien C. Tran

University of Saskatchewan - Economics

Efthymios G. Tsionas

Athens University of Economics and Business - Department of Economics

Date Written: November 10, 2009

Abstract

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

JEL Classification: C14, C33, G21, G32, G38

Suggested Citation

Delis, Manthos D. and Tran, Kien C. and Tsionas, Efthymios (Efthymios) G., Quantifying and Explaining Parameter Heterogeneity in the Capital Regulation-Bank Risk Nexus (November 10, 2009). Journal of Financial Stability, Vol. 8, 2012, Available at SSRN: https://ssrn.com/abstract=1408496

Manthos D. Delis (Contact Author)

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Kien C. Tran

University of Saskatchewan - Economics ( email )

9 Campus Drive
Saskatoon, Saskatchewan S7N 5A5
CANADA

Efthymios (Efthymios) G. Tsionas

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece
+301 8203 (Phone)
+301 8203 301 (Fax)

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