This paper examines bank liquidity management following capital shocks under capital and liquidity regulation in a period of unconventional monetary policies. Studying European banks between 2010 and 2018, we find that bank liquidity is generally not affected by a negative capital shock. Capital shocks are nevertheless transmitted into liquidity positions through balance sheet adjustments. Addressing bank-level balance sheet policies, we find that the banks de-risk assets by replacing corporate loans with financial securities, especially if the shock takes place during periods of heightened central bank interventions. Moreover, asset-side-dominant risk-reducing behavior goes against regulatory intent and indicates that regulatory arbitrage considerations affect banks’ responses to shocks. Finally, we document heterogeneous responses by banks depending on their size, type, and country. These findings imply that compliance with regulation may lead to partial shortages in corporate lending, with banks prioritizing investment in government securities in event of a capital shock.  

Changes in interest rates below the zero lower bound could have potential effects onthe payments market by making cash more attractive for consumers as a medium ofpayment and wealth storage. This paper studies how cash usage has been affected bythe recent introduction of negative interest rates in European countries. Using a difference-in-differences methodology over the period 2006 - 2018, results show anincrease in cash usage in negative interest-rate environments. We also find that theincrease in cash usage was less pronounced in countries with superior monitoringcapacity of banks (i.e. high levels of financial intermediation).

Purpose

The purpose of this paper is to review the literature that measures the concept of firms' information environment (IE) with focus on the validity of proxies used to measure IE.

Design/methodology/approach

The paper reviews the IE literature using theoretically based categories and analyzes the contextual meaning and use of IE proxies. The review is based on a selection of 284 research articles from 51 journals between 2000 and 2018. A total of 37 different proxy measures of IE are found and analyzed with respect to causality based on categories and the use of IE variables as dependent, independent and control variables.

Findings

The study indicates that the IE measures are heterogeneous and there is a lack of consensus regarding their use. The different conditions used to study IE explain part, but far from all, of this heterogeneity. Furthermore, we find that the use of IE measures is only briefly discussed or motivated among the studies in the sample. These findings suggest a necessary discussion about causality in the use of IE as dependent, independent or control variables.

Originality/value

This study contains new and significant information on IE and IE proxy measures. It provides an extensive literature review and provides a novel typology to analyze IE.

This chapter analyses spill over between banks and firms when required bank capital is regulated. We contribute to the existing literature by addressing different regulatory responses with an impact on the supply and demand of bank lending. The chapter contributes to the growing literature addressing the unintended consequences of regulatory policy development. The study empirically compares the regulatory responses of Swedish banks and how these responses affect lending to Swedish SMEs. The theoretical framework and methodology employed in this chapter make it possible to study theories related to bank monitoring, regulatory arbitrage opportunities, and the risk-return trade off. The main results indicate that banks’ regulatory responses are associated with increasing lending margins, either by (1) increasing the margin on the loan portfolios, spilling over the regulatory costs through higher prices, (2) lower acceptance of lower return customers, or (3) regulatory arbitrage through balance sheet adjustments.

Regulatory arbitrage is an avoidance strategy of regulation that is exercised as a result of a regulatory inconsistency. As a regulatory response strategy, it has been in the shadow of other possible determinants of regulatory development. This chapter reviews 91 research articles and addresses the analytical foundations of regulatory arbitrage in the literature in a search for operative definitions, theories and methodological concerns. Despite the observation that many studies treat regulatory arbitrage as a phenomenon that everyone implicitly knows, the review shows that an explicit understanding of regulatory arbitrage and its motives remains scattered. Theoretically speaking, the chapter concludes that the dominant approach is that when a regulatory arbitrage opportunity exists, it is utilised. However, several theories examining the opportunity costs related to the use of regulatory arbitrage are also identified. Both methodologically and empirically, the chapter concludes that regulatory arbitrage as a strategic choice is characterised as a non-action of an event, thus delimiting the opportunities to conduct empirical research. Transaction-based regulatory arbitrage is more straightforward, and several studies therefore present measures of regulatory arbitrage. More precise and operative definitions and expanded eclectic theoretical understanding of drivers may spur stronger empirical research and regulatory development.

The chapter considers asset and liability management (ALM) as a possible avenue for regulatory arbitrage under regulatory capital constraints. The chapter presents a theory of regulatory arbitrage as a regulatory response to capital requirements in banking depending on capitalization mechanisms and empirically analyses capital risk and bank risk in European banking in terms of ALM. The results suggest a possible loophole in today’s capital regulation via ALM and the need for regulatory arbitrage as a regulatory response.

The challenges for banks due to the new detailed regulation of the 'management body' predict a reduced bank risk at low cost. In this chapter, we determine the relevance of this statement, empirically testing whether the corporate governance of banks influences banking risk and banking efficiency. The results reveal a relationship between efficient banks and risk. However, the corporate governance variables considered in this chapter reveal limited evidence on the effect on risk, although corporate governance attributes can explain banking efficiency. Consequently, we cannot find strong support that corporate governance reduces risk without a significant cost.

Financial Systems, Markets and Institutional Changes analyses and exemplifies how the financial system endogenously adjusts to institutional changes such as new technology, political tendencies, cultural differences, new business models, and government interactions. It puts particular emphasis on how different institutional settings affect firms' borrowing and how the financial crisis affected the relationship between borrowing firms and lending banks. It further increases our understanding of how efficient financial markets are formed, by addressing issues related to the globalization of the financial market, questioning whether the EMU, with its regional imbalances, is an optimal currency union, and putting new requirements on an international lender of last resort. Recent technology development, with high frequency trading, and the increased existence of Islamic banking are two further examples of institutional changes that form new actors and new markets.