Do Regulatory and Supervisory Reforms Affect European Bank Stability: Further Evidence from Panel Data

This paper investigates the impact of regulatory and supervisory reforms on the risk-taking by European banks in the context of the subprime crisis. To this end, we employed data for six European countries (France, Germany, the UK, Spain, Italy and Greece) over the period 2005-2011, applying the Generalized Method of Moments (GMM). Our investigation pointed to three interesting findings. First, in France, Germany and the UK, supervisory power appears to boost banking stability (reduce bank’s risk-taking), while restrictions on banking activities, deposit insurance and capital adequacy encourage risky behavior, confirming the view that a strongly regulated institutional environment encourages risk-taking. Second, tightening regulations and supervision appears to weaken banking stability in Italy,
Greece and Spain as, with more supervisory power, the largest banks tend to take greater risks. Third, the strongly regulated institutional environment enhances financial stability in Europe, while European banks with a higher rate of asset growth tend to have higher risk appetite.
Keywords: European banks, Banking Supervision; Risk-taking; Dynamic Panel.
JEL Codes: G21; G28; G32; C23.