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The effect of political institutions on the interplay between banking regulation and banks’ risk

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Abstract

This paper examines whether the influence of banking regulation on banks’ risk is channeled through the quality of political institutions. As banking regulatory factors, we consider capital stringency, activity restrictions and supervisory power. The overall effect of banking regulation on banks’ risk is conditional on the quality of political institutions. Activity restrictions and capital stringency have a statistically significant positive effect on banks’ risk. This effect is mitigated by better political institutions. In contrast, stringent supervisory power tends to reduce banks’ risk, and better political institutions reinforce this effect. The results are robust for alternative estimation methods and risk measures.

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Data availability

The data that support the findings of this study are available from the corresponding author upon reasonable request.

Notes

  1. The null hypothesis states that all instruments are jointly exogenous and that the instruments used are not correlated with residuals.

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Funding

This paper is financed by FCT – Fundação para a Ciência e a Tecnologia, I.P.’s grant numbers UIDB/00315/2020 and UIDB/00685/2020, and by Governo Regional dos Açores, DRCT – Direção Regional da Ciência e Tecnologia’s, Grant No. M1.1.a/005/Funcionamento/2020.

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Authors and Affiliations

  1. School of Business and Economics, University of the Azores, Rua da Mãe de Deus, s/n, 9501-801, Ponta Delgada, Portugal

    Tiago M. Dutra & João C. A. Teixeira

  2. Business Research Unit (BRU-IUL), Avenida das Forças Armadas, 1649-026, Lisbon, Portugal

    Tiago M. Dutra & José Carlos Dias

  3. Centre of Applied Economics Studies of the Atlantic (CEEAplA), Rua da Mãe de Deus, s/n, 9501-801, Ponta Delgada, Portugal

    João C. A. Teixeira

  4. Instituto Universitário de Lisboa (ISCTE-IUL), Avenida das Forças Armadas, 1649-026, Lisbon, Portugal

    José Carlos Dias

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  1. Tiago M. Dutra
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Dutra, T.M., Teixeira, J.C.A. & Dias, J.C. The effect of political institutions on the interplay between banking regulation and banks’ risk. J Bank Regul (2023). https://doi.org/10.1057/s41261-023-00225-8

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