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The Spillover Effects of Prudential Regulation on Banking Competition

Author

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  • Giovanni Ferri
  • Valerio Pesic

Abstract

European supervisors aggressively requested more capital at large banks. That may cut credit to the economy. We confirm that especially larger banks cut loans while less-significant banks partly offset that credit drop. Moreover, we identify nasty spillovers from that interaction. Specifically, larger banks’ deleveraging was associated with significant portfolio worsening for mid-sized banks. We conjecture that while small banks’ loan expansion was somewhat shielded by superior soft-information-based technologies, medium-sized banks were fully exposed to lending to bad borrowers as they boosted loans by relying on credit scoring and Internal Rating Based models. That is proving tricky through the prolonged European dip. Die europäischen Aufsichtsbehörden forderten aggressiv mehr Kapital bei den Großbanken. Das könnte die Kreditvergabe an die Wirtschaft einschränken. Wir bestätigen, dass vor allem größere Banken ihre Kredite kürzten, während weniger bedeutende Banken diesen Kreditrückgang teilweise kompensierten. Darüber hinaus identifizieren wir unangenehme Spillovers aus dieser Interaktion. Insbesondere die Deleveraging-Aktivitäten der größeren Banken waren mit einer deutlichen Verschlechterung des Portfolios bei mittelgroßen Banken verbunden. Wir gehen davon aus, dass die Kreditausweitung der kleinen Banken zwar durch überlegene Soft-Informationstechnologien etwas abgeschirmt war, dass aber mittelgroße Banken voll und ganz der Kreditvergabe an schlechte Kreditnehmer ausgesetzt waren, da sie die Kredite durch Kredit-Scoring und interne ratingbasierte Modelle ausweiteten. Das erweist sich als problematisch durch die anhaltende europäische Krise.

Suggested Citation

  • Giovanni Ferri & Valerio Pesic, 2020. "The Spillover Effects of Prudential Regulation on Banking Competition," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 89(1), pages 59-99.
  • Handle: RePEc:diw:diwvjh:89-1-5
    DOI: 10.3790/vjh.89.1.59
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    Cited by:

    1. Böhnke, Victoria & Ongena, Steven & Paraschiv, Florentina & Reite, Endre J., 2023. "Back to the roots of internal credit risk models: Does risk explain why banks' risk-weighted asset levels converge over time?," Journal of Banking & Finance, Elsevier, vol. 156(C).

    More about this item

    Keywords

    Bank Credit; bank capital requirements; prudential regulation; mid-sized banks; spillover effects; europe; business cycle;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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