Rules and Discretion(s) in Prudential Regulation and Supervision: Evidence from EU Banks in the Run-Up to the Crisis
Ahead of the financial crisis, prudential regulation in the EU was implemented non-uniformly across countries. National options and discretions promoted more flexible regulation and a larger degree of discretion for the supervisors. Banks established in countries with a less stringent prudential regulation were more likely to require government support during the crisis. Banks operating in a less stringent micro-prudential framework were more reliant on non-interest income sources, had larger portfolio of government securities and smaller liquidity buffers, pointing to a general increase in risk-taking. We show that in countries with a less stringent prudential framework, banks with smaller holdings of government securities and less reliant on non-lending sources of income had a lower probability to require crisis support.
Area: Financial Regulation and Supervision
Keywords: Prudential Regulation and Supervision; European Banking; Cross-country Heterogeneities; Rules versus Discretion; Banking Union
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