Featured Product

    IMF Paper Examines Impact of Bank Competition on Systemic Risk

    July 02, 2019

    IMF published a working paper that examines how bank competition in the run up to the 2007-2009 crisis affects systemic risk of banks during the crisis. It also investigates the extent to which capitalization and securitization affect the relationship between market power and systemic risk, particularly their role in shaping bank incentives to screen and monitor borrowers in the provision of credit. Using a sample of the largest listed banks from 15 countries, it was found that greater market power at the bank level and higher competition at the industry level lead to higher realized systemic risk. The results suggest that the use of securitization exacerbates the effects of market power on the systemic dimension of bank risk, while capitalization partially mitigates its impact.

    The paper provides a discussion of the theoretical framework, reviews the relevant literature, and sets out the empirical model, data sources, and identification strategy. It also covers the empirical results, results of robustness tests, and further identification analyses via the separate estimation of non-mortgage and mortgage securitization. The financial crisis has shown that it is necessary to take a more detailed look at how changes to the banking system (such as securitization or enhanced solvency regulations) alter the behavior of banks. The findings suggest that regulators should pay close attention to how these changes interact with competition in banking markets. The finding that capitalization does not fully counterbalance the impact of securitization on the market power-systemic risk relationship implies that capital adequacy requirements might need to be supplemented with additional supervisory tools to strengthen banks’ incentives to screen and monitor their borrowers more intensively. 

    The results show that bank-specific market power in the pre-crisis period leads to higher systemic risk during the crisis and that a higher level of competition at the industry level is associated with a higher level of bank systemic risk during the crisis. The positive relationship between market power and systemic risk decreases with capitalization but increases with securitization. Furthermore, bank capital does not fully counterbalance the effect of securitization on the relationship between market power and systemic risk. The results are robust to a number of tests, including different measures of systemic risk, competition, and capitalization, as well as to the inclusion of additional bank-specific characteristics and additional estimations using instrumental variables. It can be concluded that banking supervisors and macro-prudential regulators should collaborate closely with competition authorities to prevent the buildup of large systemic risks. The findings also suggest that bank capital alone is not sufficient to offset the adverse impact of competition and securitization on systemic risk of banks. In particular, the higher capital requirements in Basel III may need to be supplemented with additional regulatory tools that can incentivize banks to increase screening and tighten lending standards for certain borrowers to mitigate the creation of systemic risk.

     

    Related Link: Working Paper

     

    Keywords: International, Banking, Systemic Risk, Securitization, Capital Adequacy Requirements, Market Power, Basel III, Regulatory Capital, IMF

    Featured Experts
    Related Articles
    News

    APRA Publishes Approach to Regulating and Supervising GCRA Risks

    APRA published an information paper that sets out a more intensive regulatory approach to transform governance, culture, remuneration, and accountability (GCRA) practices across the prudentially regulated financial sector.

    November 19, 2019 WebPage Regulatory News
    News

    IAIS Publishes Application Paper on Recovery Planning

    IAIS published the final application paper on recovery planning, along with the resolution of comments on the draft application paper.

    November 18, 2019 WebPage Regulatory News
    News

    FSB Publishes Summary of November Meeting of RCG for MENA Region

    FSB published a summary of the November meeting of the Regional Consultative Group (RCG) for Middle East and North Africa (MENA).

    November 17, 2019 WebPage Regulatory News
    News

    EBA Single Rulebook Q&A: Second Update for November 2019

    EBA updated the Single Rulebook question and answer (Q&A) tool with answers to eight questions that relate to the Bank Resolution and Recovery Directive (BRRD) and the Capital Requirements Regulation and Directive (CRR and CRD).

    November 15, 2019 WebPage Regulatory News
    News

    FSI Examines Use of Red Team Testing to Enhance Cyber Resilience

    The Financial Stability Institute (FSI) of BIS published a paper that examines the contribution of red team testing frameworks toward enhancing cyber resilience.

    November 15, 2019 WebPage Regulatory News
    News

    FASB Delays Effective Dates for CECL, Leases, and Hedging Standards

    FASB issued two Accounting Standards Updates finalizing the delays in effective dates for standards on current expected credit losses (CECL), leases, hedging, and long-duration insurance contracts.

    November 15, 2019 WebPage Regulatory News
    News

    ESMA Updates Q&A on Securitization Regulation in November 2019

    ESMA updated questions and answers (Q&A) on the Securitization Regulation (Regulation 2017/2402).

    November 15, 2019 WebPage Regulatory News
    News

    HKMA Announces Finalization of Banking Liquidity Amendment Rules 2019

    HKMA issued a letter informing all authorized institutions that negative vetting of the Banking (Liquidity) (Amendment) Rules 2019 (BLAR) has now expired. Thus, the BLAR will now come into operation from January 01, 2020.

    November 15, 2019 WebPage Regulatory News
    News

    BCBS Consults on Revised Disclosures for Market Risk Framework

    BCBS launched a consultation on the revised disclosure requirements for the market risk framework for banks.

    November 14, 2019 WebPage Regulatory News
    News

    BCBS Consults on Disclosure Templates of Sovereign Exposures of Banks

    BCBS published a consultation on the voluntary disclosure templates related to sovereign exposures of banks.

    November 14, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 4167