0000000000977075
AUTHOR
Christian Seckinger
Capital Regulation with Heterogeneous Banks
We provide a general equilibrium analysis of potential consequences from the introduction of a binding leverage ratio, as proposed in Basel III. If banks differ in their monitoring skills and their ability to successfully complete a risky investment project, a tighter leverage ratio does not only mitigate moral hazard arising from limited liability, but also carries an unintended consequence: Banks are not allowed to absorb the entire supply of debt if they cannot raise new equity, which induces agents with a lower monitoring skill to open a bank. This decreases the average ability of operating banks. We further show that rising heterogeneity in the banking sector increases this negative ef…
Financial Fragmentation and Economic Growth in Europe
Using industry data from Eurostat and applying the Rajan-Zingales methodology, we investigate the real growth effects of banking sector integration in the European Union. Our sample stretches from 2000 until 2012 and includes the phase of rapid financial integration before the global financial crisis as well as the following phase of financial fragmentation and bank deleveraging. We find evidence that banking sector integration had a more than four times stronger growth effect during the crisis than in normal times. Growth effects are also stronger in times of domestic bank deleveraging. We conclude that concerns of European policy makers about fragmentation in the European banking sector a…