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The Macroeconomic Effects of Bank Regulation: New Evidence from a High-Frequency Approach

Author

Listed:
  • Thomas Drechsel
  • Ko Miura

Abstract

Bank regulation supports financial stability, but might constrain economic activity. This paper estimates the macroeconomic effects of bank regulation using a high-frequency identification approach. We measure market surprises in a bank stock price index during a narrow time window around Federal Reserve speeches that discuss the US banking system and its regulation. We then develop a sign restriction procedure to elicit the variation in these market surprises that can be interpreted as news about bank regulation. News that bank regulation will be tighter than expected mitigates risk in the banking sector, but reduces economic activity by increasing banks' funding costs and tightening loan supply. A 10 basis point regulation-induced peak reduction in bank risk premiums is accompanied by a 15 basis point peak increase in the unemployment rate. Compared to previous studies, these magnitudes suggest a relatively high macroeconomic cost of tightening bank regulation, at least in the short run.

Suggested Citation

  • Thomas Drechsel & Ko Miura, 2026. "The Macroeconomic Effects of Bank Regulation: New Evidence from a High-Frequency Approach," NBER Working Papers 35071, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35071
    Note: ME
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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