The influence of regulation on the capital and financing structure of banks

Triggered by the financial crisis in 2007, US opinion leaders in particular argued that the banking regulations of other countries were not strict enough to guide banks’ to hold sufficient amounts of capital. Motivated by these debates, this dissertation comprises three papers that question whether bank regulation has an effect on the capital ratios or the liquidity ratios of banks.
The first paper applies a partial adjustment model using the generalised method of moments regression technique in order to find explanatory variables for the capital ratios of banks around the world. These variables include various regulatory factors, which cover different aspects of regulation severity. The second paper applies a difference-in-difference (DiD) approach to investigate whether the announcement of an early-comprehensive introduction of the new Basel II regulatory framework in 2004 for European countries led the capital ratios of these banks developing differently compared to banks from late-partial adopting countries. The third paper uses the same model and similar variables as the first paper, but examines the impact of these variables on the liquidity ratio instead of the capital ratio.
In contrast to the US camp’s claims, the dissertation reveals that regulation is not the dominant factor when banks set their capital or liquidity structure. I do not find a measurable effect on the financing structure and only minor evidence of an effect on the capital structure. To conclude, bank regulations aiming for stronger capital and liquidity structures have not achieved the desired results with the old regulatory frameworks. The current discussion regarding the new Basel III framework shows that the topic is still controversial and it will be interesting to see if this new framework alters the results of my thesis.