Rules and Discretion(s) in Prudential Regulation and Supervision: Evidence from EU Banks in the Run-Up to the Crisis

68 Pages Posted: 23 May 2019

See all articles by Angela Maddaloni

Angela Maddaloni

European Central Bank (ECB)

Alessandro Scopelliti

European Central Bank (ECB) - Directorate General Economics; University of Zurich - Department of Banking and Finance

Date Written: May 22, 2019

Abstract

Prior to the financial crisis, prudential regulation in the EU was implemented non-uniformly across countries, as options and discretions allowed national authorities to apply a more favorable regulatory treatment. We exploit the national implementation of the CRD and derive a country measure of regulatory flexibility (for all banks in a country) and of supervisory discretion (on a case-by-case basis). Overall, we find that banks established in countries with a less stringent prudential framework were more likely to require public support during the crisis. We instrument some characteristics of bank balance sheets with these prudential indicators to investigate how they affect bank resilience. The share of non-interest income explained by the prudential environment is always associated with an increase in the likelihood of financial distress during the crisis. Prudential frameworks also explain banks’ liquidity buffers even in absence of a specific liquidity regulation, which points to possible spillovers across regulatory instruments.

Keywords: prudential regulation and supervision, European banking, cross-country heterogeneities, rules versus discretion, banking union

JEL Classification: G01, G21, G28

Suggested Citation

Maddaloni, Angela and Scopelliti, Alessandro, Rules and Discretion(s) in Prudential Regulation and Supervision: Evidence from EU Banks in the Run-Up to the Crisis (May 22, 2019). ECB Working Paper No. 2284 (2019); ISBN 978-92-899-3546-3 . Available at SSRN: https://ssrn.com/abstract=3392813

Angela Maddaloni (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alessandro Scopelliti

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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