Regulation and Bank Deficiency: Evidence from Europe

Abstract

This paper investigates the impact of bank regulation on default risk for a sample of six major European countries over 2003-2008. In the first stage of the analysis, we used a descriptive study for the determination of factors that contributed to the bank vulnerability. We measure banking fragility by using two ex-ante variables Zscore and rating to indicate future risk, and we use public intervention as an ex-post variable for bank failure. In the second stage, we used Logit regression models to assess several types of regulation on bank failure. Our results show that strengthening capital restrictions and supervision can improve bank solvency. While, market discipline and restricting bank activities can result in higher bank insolvency.

Keywords: Bank Regulation , Basel Committee, CAMEL Model, Z score, Logit Regression

JEL Classification: G21, C35