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Regulation and De-Risking: Theoretical and Empirical Insights

Haar, L and Gregoriou, A (2023) Regulation and De-Risking: Theoretical and Empirical Insights. Risks, 11 (6).

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The purpose of the Bank for International Settlements regulatory agenda, as implemented by financial regulators globally, has been to make banks safer and reduce the likelihood of systemic events. Using an original model of bank profit maximisation under a regulatory constraint, we statistically examine how market risk exposure has interacted with financial performance and capital structure, to see if the Basel regulatory agenda concerning the quantity, quality and liquidity of capital, has prompted changes in banking behaviour as measured by exposure to market risk. Breaking new ground, we empirically explore how the regulatory agenda has affected the largest banks. We analyse if the regulatory agenda has succeeded in aligning the cost of capital with their exposure to market risk, measured by Value at Risk; or if regulations have induced changes to banking activities. We find rather than regulation inducing changes to the rate at which unchanged risk exposure is capitalised; it leads to changes in the nature of exposures. Risk has declined along with financial performance while the cost of capital is largely unchanged. A consequence of regulation may be to encourage the migration of riskier activities to organisations where it may be borne more cheaply.

Item Type: Article
Uncontrolled Keywords: 1502 Banking, Finance and Investment; 1503 Business and Management
Subjects: H Social Sciences > HF Commerce > HF5001 Business
Divisions: Liverpool Business School
Publisher: MDPI
SWORD Depositor: A Symplectic
Date Deposited: 05 Jul 2024 13:04
Last Modified: 05 Jul 2024 13:15
DOI or ID number: 10.3390/risks11060104
URI: https://researchonline.ljmu.ac.uk/id/eprint/23710
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