The limits of model-based regulation

Behn, M, Haselmann, R and Vig, V (2021) The limits of model-based regulation. Working Paper. Working Paper. OPEN ACCESS

Abstract

Using loan-level data from Germany, we investigate how the introduction of model-based capital regulation affected banks’ ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks ‘optimized’ model-based regulation to lower their capital requirements. Banks systematically underreported risk, with underreporting being more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.

More Details

Item Type: Monograph (Working Paper)
Subject Areas: Finance
Additional Information:

This project has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement No. 679747).

Funder Name: European Research Council
Date Deposited: 17 Sep 2021 15:14
Last Modified: 15 Oct 2021 12:22
URI: https://lbsresearch.london.edu/id/eprint/1965
More

Export and Share


Download

Updated Version - Text

Statistics

Downloads from LBS Research Online

View details

Actions (login required)

Edit Item Edit Item