Banking regulation - A study of its effectiveness in reducing risk in European banks

Abstract

We gathered a dataset of 24 European banks from 10 different countries in order to test the effectiveness of European banking regulation through a fixed effects panel regression. Our results suggest that increased capital requirements, tier 1 capital ratio, and more supervisory power lead to higher bank risk. We also found that increased activity restrictions lead to lower risk, however, the coefficient estimate is not statistically significant. For the bank-specific and macro controls we find that return on assets and unemployment rate are the best predictors of bank risk. A higher return on assets will lead to lower risk while a higher unemployment rate leads to higher risk. We conclude that regulatory measures employed during this period were not effective in reducing risk. This