Banking regulation - burden or blessing?

Abstract

Purpose

The purpose of this paper is to explore the impact of regulation on previously unregulated banks’ balance-sheet growth using the 1880 Danish Savings Bank Act as a natural experiment. With the Act, Danish savings banks became, for the first time, subject to regulation and supervision whereas commercial banks continued as unregulated institutions.

Design/methodology/approach

The main elements of the Act focussed on supervision and provisions to improve information transparency. The paper estimates the impact of the Act on the balance-sheet growth of Danish savings banks using bank-level panel data and a difference-in-differences approach.

Findings

The paper finds no indications that the Act had a negative effect on the balance-sheet growth of savings banks compared to commercial banks in the short run. Furthermore, there are indications of a positive effect after a couple of years. This suggests that regulation is not always a burden for the regulated institutions and might even have a positive impact on their business activity.

Originality/value

This paper is the first study using the introduction of banking supervision and regulation in the 1800s as a natural experiment to evaluate the causal effect of regulation on the balance-sheet growth of previously unregulated financial intermediaries.

Citation

Abildgren, K. (2019), "Banking regulation - burden or blessing?", Journal of Financial Economic Policy, Vol. 11 No. 4, pp. 548-562. https://doi.org/10.1108/JFEP-10-2018-0155