Regulating financial markets: Costs and trade-offs

This thesis studies the interactions between the institutional design of financial systems, and the financial agents that regulatory institutions supervise. It explores the channels through which financial regulation affects financial agents’ lending, funding, and risk-taking decisions. By introducing regulatory and market penalties for non-compliance with minimum capital requirements, this thesis investigates the responses of bank capital ratios to changes in the regulatory minimum, as envisaged under the recently introduced Basel III framework. It then studies the role of tight regulations for the emergence, and expansion of the shadow banking sector. It shows that attempts to regulate traditional intermediaries more strictly increase the attractiveness of shadow activities, that are not subject to regulations.
Finally, the thesis studies potential consequences of supranational financial regulations, such as the banking union in the European Union, in the presence of integrated financial markets. The main result is that although the supranational regulator eliminates cross-border spillovers from defaults of internationally-operating intermediaries, it also negatively affects their risk-taking incentives.