The More the Merrier? Evidence from the Global Financial Crisis on the Value of Multiple Requirements in Bank Regulation

38 Pages Posted: 3 Feb 2021

See all articles by Marcus Buckmann

Marcus Buckmann

Bank of England

Paula Gallego Marquez

Bank of England

Mariana Gimpelewicz

Bank of England

Sujit Kapadia

European Central Bank (ECB); Bank of England

Katie Rismanchi

Bank of England

Date Written: January 29, 2021

Abstract

This paper assesses the value of multiple requirements in bank regulation using a novel empirical rule‑based methodology. Exploiting a dataset of capital and liquidity ratios for a sample of global banks in 2005 and 2006, we apply simple threshold-based rules to assess how different regulations individually and in combination might have identified banks that subsequently failed during the global financial crisis. Our results generally support the case for a small portfolio of different regulatory metrics. Under the objective of correctly identifying a high proportion of banks which subsequently failed, we find that a portfolio of a leverage ratio, a risk-weighted capital ratio, and a net stable funding ratio yields fewer false alarms than any of these metrics individually – and at less stringent calibrations of each individual regulatory metric. We also discuss how these results apply in different robustness exercises, including out-of-sample evaluations. Finally, we consider the potential role of market-based measures of bank capitalisation, showing that they provide complementary value to their accounting-based counterparts.

Keywords: Banking regulation, Basel III, bank failure, global financial crisis, marketbased metrics, regulatory complexity

JEL Classification: G01, G18, G21, G28

Suggested Citation

Buckmann, Marcus and Gallego Marquez, Paula and Gimpelewicz, Mariana and Kapadia, Sujit and Rismanchi, Katie, The More the Merrier? Evidence from the Global Financial Crisis on the Value of Multiple Requirements in Bank Regulation (January 29, 2021). Bank of England Working Paper No. 905, Available at SSRN: https://ssrn.com/abstract=3778190 or http://dx.doi.org/10.2139/ssrn.3778190

Marcus Buckmann (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Paula Gallego Marquez

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mariana Gimpelewicz

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sujit Kapadia

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
020-7601-5507 (Phone)

Katie Rismanchi

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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