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The effect of political institutions on the interplay between banking regulation and banks’ risk

Author

Listed:
  • Tiago M. Dutra

    (University of the Azores
    Business Research Unit (BRU-IUL))

  • João C. A. Teixeira

    (University of the Azores
    Centre of Applied Economics Studies of the Atlantic (CEEAplA))

  • José Carlos Dias

    (Business Research Unit (BRU-IUL)
    Instituto Universitário de Lisboa (ISCTE-IUL))

Abstract

This paper examines whether the influence of banking regulation on banks’ risk is channeled through the quality of political institutions. As banking regulatory factors, we consider capital stringency, activity restrictions and supervisory power. The overall effect of banking regulation on banks’ risk is conditional on the quality of political institutions. Activity restrictions and capital stringency have a statistically significant positive effect on banks’ risk. This effect is mitigated by better political institutions. In contrast, stringent supervisory power tends to reduce banks’ risk, and better political institutions reinforce this effect. The results are robust for alternative estimation methods and risk measures.

Suggested Citation

  • Tiago M. Dutra & João C. A. Teixeira & José Carlos Dias, 2024. "The effect of political institutions on the interplay between banking regulation and banks’ risk," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(2), pages 179-196, June.
    • Handle: RePEc:pal:jbkreg:v:25:y:2024:i:2:d:10.1057_s41261-023-00225-8
    DOI: 10.1057/s41261-023-00225-8
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    More about this item

    Keywords

    Bank risk; Banking regulation; Political institutions;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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