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
Date Written: January 29, 2021
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: Suggested Citation