Essays on Bank Prudential Regulations

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Issue Date
2020-01-01Author
Han, Ruoning
Publisher
University of Kansas
Format
122 pages
Type
Dissertation
Degree Level
Ph.D.
Discipline
Economics
Rights
Copyright held by the author.
Metadata
Show full item recordAbstract
This paper theoretically and empirically analyzes the relationship between deposit competition, model-based capital requirements (BaselAccords) and bank risk-taking. I first build a model where banks are subject to capital requirements in which there are arbitrage opportunities in an internal rating based (IRB) approach introduced in Basel II/III, depositors have preference on banks due to transaction cost, and the regulator conducts supervisory check on bank capital adequacy. The model shows two sets of results: first, given a certain level of deposit competition and as the capital requirements are evolved, the effectiveness of the requirements on reducing bank risk-taking improves when supervisory power is high enough to restrict bank arbitrage in IRB approach; second, the non-risk based leverage ratio in Basel III, when binding, can simultaneously reduce bank risk-taking and lower required supervisory power that restricts bank arbitrage. However, the binding ratio can potentially distort some banks' incentives to invest prudently. I then externally validate some testable implications drawn from the theory with System GMM and Difference-in-Difference using a large panel dataset for U.S. commercial banks. I find that the introduction of IRB approach reduces bank ex ante credit risk, suggesting the potential regulatory capital arbitrage. I also find that lower deposit competition and stricter capital requirements reduce bank credit risk. All empirical findings are consistent with the theory. Keywords: Capital Requirements, Internal-Rating Based Approach, Leverage Ratio, Competition, Supervision. JEL classification: G21, G28.
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