Do Bank Capital Regulations Concentrate Systematic Risk?

41 Pages Posted: 22 Jan 2016

See all articles by Jason D. Kotter

Jason D. Kotter

Brigham Young University - Department of Finance

Date Written: September 29, 2015

Abstract

As a result of the Enron scandal, new regulations were enacted that increased the capital charge for holding assets in off-balance sheet vehicles. I utilize a triple difference specification to identify the effect of this exogenous regulatory shock on bank systematic risk exposure. I find that after the regulation, banks' exposure to off-balance sheet assets at vehicles with high systematic risk increases relative to vehicles with low systematic risk and relative to non-U.S. banks which are not affected by the regulation. These results suggest that capital regulation might have the perverse effect of concentrating systematic risk, potentially increasing the systemic risk of the financial system.

Keywords: systematic risk, banking, regulation

JEL Classification: G21, G28

Suggested Citation

Kotter, Jason D., Do Bank Capital Regulations Concentrate Systematic Risk? (September 29, 2015). Available at SSRN: https://ssrn.com/abstract=2719583 or http://dx.doi.org/10.2139/ssrn.2719583

Jason D. Kotter (Contact Author)

Brigham Young University - Department of Finance ( email )

United States

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