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Does Regulation Only Bite the Less Profitable? Evidence from the Too‐Big‐To‐Fail Reforms

Author

Listed:
  • TIRUPAM GOEL
  • ULF LEWRICK
  • AAKRITI MATHUR

Abstract

What shapes banks' response to capital requirement reforms? While prereform capitalization is important in the short term, we posit that profitability is key in the medium term, as it underpins banks' capacity to build capital. We examine the impact of capital surcharges on systemically important banks. Through a novel application of textual analysis to identify when banks react, we show that less profitable banks contract when faced with higher requirements, especially if they are closer to the thresholds that determine their surcharges. Conversely, more profitable banks continue to expand, improving banking efficiency but raising concerns about concentration and exposure to tail risks.

Suggested Citation

  • Tirupam Goel & Ulf Lewrick & Aakriti Mathur, 2025. "Does Regulation Only Bite the Less Profitable? Evidence from the Too‐Big‐To‐Fail Reforms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 57(8), pages 2043-2074, December.
    • Handle: RePEc:wly:jmoncb:v:57:y:2025:i:8:p:2043-2074
    DOI: 10.1111/jmcb.13211
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    Cited by:

    1. is not listed on IDEAS
    2. Mathur, Aakriti & Sengupta, Rajeswari & Pratap, Bhanu, 2024. "Equity market responses to surprise Covid-19 lockdowns: The role of pandemic-driven uncertainty," Journal of Asian Economics, Elsevier, vol. 91(C).
    3. Aakriti Mathur & Rajeswari Sengupta & Bhanu Pratap, 2022. "Saved by the bell? Equity market responses to surprise Covid-19 lockdowns and central bank interventions," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2022-001, Indira Gandhi Institute of Development Research, Mumbai, India.
    4. Luis Garcia & Ulf Lewrick & Taja Sečnik, 2021. "Is window dressing by banks systemically important?," BIS Working Papers 960, Bank for International Settlements.

    More about this item

    JEL classification:

    • 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
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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