Behind the scenes of the beauty contest: window dressing and the G-SIB framework
The additional capital requirements imposed on Global Systemically Important Banks (G-SIBs) by the post-crisis financial regulatory framework is determined by the size and volume of banks’ activities at the end of each year. This paper finds that banks subject to the G-SIB requirements are more likely to reduce relevant activities at the end of the year relative to other banks. This effect is stronger for banks closer to a higher capital requirement threshold and those with a larger amount of repo market activities that can be terminated easily at reporting dates.
Read More: https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2298~c461fb89c7.en.pdf?97b665a8bb47400584df1289a987c01e
Impact of Higher Capital Buffers on Banks’ Lending and Risk-Taking: Evidence from the Euro Area Experiments (Cappelletti et al)
European national authorities began identifying Other Systemically Important Institutions (O-SIIs) in 2015, imposing additional capital requirements on these banks. This paper uses confidential supervisory data to investigate whether these higher capital buffers constrain lending. The authors find that, in the short-term, O-SIIs reduced overall lending and shifted that lending from households and financial sectors to less-risky non-financial corporations, but in the medium-term the overall effect on credit supply was less pronounced as O-SIIs increased their lending to the households and financial sectors, albeit to less risky borrowers.
Read More: https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2292~77deb8b18f.en.pdf?bdeeddeb2191e8c0c42ec77c3b3ea50c
Regulators’ Disclosure Decisions: Evidence from Bank Enforcement Actions (Kleymenova and Tomy)
While regulatory disclosure requirements induce market discipline and increase firm transparency, they also increase the visibility of regulatory actions. This paper finds that, after regulators were required to publicly disclose enforcement actions by the 1989 Financial Institutions Reform, Recovery, and Enforcement Act, regulators were more likely to issue enforcement actions and rely on publicly observable signals to issue enforcement orders. Moreover, the disclosure of enforcement actions led to a decline in deposits, improvement in asset quality and an increase in regulatory capital ratios.
Read More: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3327502
Artificial Intelligence and Systemic Risk (Danielsson et al)
Artificial intelligence (AI) thrives when it can be applied to data on many similar events; financial crises, however, are both rare and unique. This paper identifies four ways in which artificial intelligence could create new or amplify existing risks to the financial system: (i) the inability to deal with issues it has not seen before during a financial crisis; (ii) difficulties associated with AI “black-box” decisions; (iii) the amplification of financial cycles as a result of model monoculture; and (iv) the high rationality and predictability of AI would more easily allow market participants to exploit the financial system for private gain.
Read More: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3410948