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Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences

Author

Listed:
  • Adrien Alvero
  • Sakai Ando
  • Kairong Xiao

Abstract

We show that distortion in the size distribution of banks around regulatory thresholds can be used to identify costs of bank regulation. We build a structural model in which banks can strategically bunch their assets below regulatory thresholds to avoid regulations. The resultant distortion in the size distribution of banks reveals the magnitude of regulatory costs. Using U.S. bank data, we estimate the regulatory costs imposed by the Dodd-Frank Act. Although the estimated regulatory costs are substantial, they are significantly lower than banks’ self-reported estimates.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Adrien Alvero & Sakai Ando & Kairong Xiao, 2023. "Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences," The Review of Financial Studies, Society for Financial Studies, vol. 36(6), pages 2224-2273.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:6:p:2224-2273.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac089
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    Cited by:

    1. He, Dongwei & Wu, Yifan & Wang, Yifan & Xing, Xueyan, 2023. "Prudential regulation and bank performance: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).

    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

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