December 22, 2010

Banking risk and regulation: Does one size fit all?

Using data for more than 200 banks from 21 OECD countries for the period 2002 to 2008, we examine the impact of bank regulation and supervision on banking risk.

Supervisory control, and regulations on capital and market entry have a significant impact on 'capital and asset risk', while supervisory control and regulations on activities restrictions, private monitoring, market entry, and liquidity, have a significant effect on 'liquidity and market risk'.

However, quantile regressions suggest that the effect of regulation and supervision differs across banks: most indicators of bank regulation and supervision do not have a significant effect on low-risk banks, while they do affect high-risk banks.