Setting boundaries: finding thresholds in bank regulation

Zahid Amadxarif, Paula Gallego Marquez and Nic Garbarino

“We’ve done a lot to lower prudential barriers to entry into the banking sector […] but have we done enough to lower the equivalent barriers to growth?” asked PRA CEO Sam Woods in a recent speech. To make regulation proportionate, policymakers adapt regulatory requirements to the risks posed by each firm. But regulators face a trade-off between addressing systemic risks in a proportionate way and limiting regulatory complexity. New thresholds can create complexity and cliff-edge effects that can discourage healthy firms from growing. We identify regulatory thresholds for UK banks and building societies using textual analysis on a new dataset that contains the universe of prudential rules.

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Mind the steps: competition implications of graduated approach to setting capital surcharges

Paolo Siciliani, Nic Garbarino, Thomas Papavranoussis and Jonathan Stalmann.

Systemically important banks are material providers of critical economic functions.  The Global Financial Crisis showed how distress or failure of one of these firms may have a severe impact on the financial system and the real economy.  Systemic capital surcharges protect the economy from these negative spillovers by decreasing systemically important firms’ probability of distress or failure.   A graduated approach facilitates effective competition to the extent that the capital surcharges faced by firms are more proportionate to the scale of systemic risks that they pose. This post illustrates some of the competition implications with respect to the methodology used to set the number and level of thresholds.

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