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Regulation and contagion of banks

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  • Yvan Lengwiler
  • Dietmar Maringer

Abstract

Bank regulation is supposed to reduce the probability of bank failure and, if a failure occurs, to contain the damage so that system-wide problems are unlikely. The current regulatory framework, known as Basel II, is based, among other things, on risk-adjusted capital requirements. This framework has failed in the recent global financial crisis. Some believe that one of the culprits is the exclusion of so-called shadow banks (for example, hedge funds and investment banks) from regulation. We find little support for this assumption in our simulations. To the contrary, our simulations reveal that extending the same regulation to more entities is likely to produce very synchronous behaviour and thus exacerbate contagion and market crashes. On the other hand, the new size-adjusted regulation (the so-called leverage ratio) that has been proposed in Basel III appears to be more robust.

Suggested Citation

  • Yvan Lengwiler & Dietmar Maringer, 2015. "Regulation and contagion of banks," Journal of Banking Regulation, Palgrave Macmillan, vol. 16(1), pages 64-71, January.
    • Handle: RePEc:pal:jbkreg:v:16:y:2015:i:1:p:64-71
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    Citations

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    Cited by:

    1. Retselisitsoe I. Thamae & Nicholas M. Odhiambo, 2022. "The impact of bank regulation on bank lending: a review of international literature," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(4), pages 405-418, December.
    2. Huynh, Toan Luu Duc & Nasir, Muhammad Ali & Nguyen, Sang Phu & Duong, Duy, 2020. "An assessment of contagion risks in the banking system using non-parametric and Copula approaches," Economic Analysis and Policy, Elsevier, vol. 65(C), pages 105-116.
    3. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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