Finance Brown Bag Seminar
Speaker: Magdalena Ignatowski, Goethe University Frankfurt
Title: Wishful Thinking or Effective Threat? Tightening Bank Resolution Regimes and Bank Risk-Taking
Abstract: We propose a framework for testing the effects of changes in bank resolution regimes on bank behavior, particularly on a variety of risk- and business model-measures. By exploiting the differential relevance of recent changes in U.S. bank resolution law (i.e. the introduction of the Orderly Liquidation Authority, OLA) for different types of banks, we are able to simulate a quasi-natural experiment to test otherwise endogenous effects in a difference-in-difference framework. To the best of our knowledge, this identification strategy is unique in its application to regulatory changes in bank resolution. To test our hypotheses, we use a three level dataset: Holding aggregates, bank level data, and loan level data. We find banks that are more affected by the introduction of the OLA to significantly decrease their overall risk-taking and to shift their business model and new loan origination towards lower risk - indicating the overall effectiveness of the regime change. This effect, however, does not hold for the largest and most systemically important institutions, indicating that the application of the OLA does not represent a credible threat to these institutions, leaving the too-big-to-fail problem unresolved. Finally, we find no evidence of gambling between the announcement and enactment of the OLA, presumably since the legislation was passed comparably quickly. Our results intend to contribute to the emerging literature evaluating implications of new regulatory policies, and allow relevant conclusions for the design of bank resolution law, e.g. in the context of the European Banking Union.