Bank regulation focuses on spillovers from large banks to the banking system rather than risks from the banking system to banks. We document that traditional and trading activities affect the flow of systemic risk differently in each direction. We term this phenomenon asymmetric systemic risk, measure it, and explore the consequences and channels behind it. We show higher trading exposures and lower traditional activities underpin higher asymmetry of systemic-risk flows, which was associated with higher default risk during the 2008 crisis through increased profit volatility.
This study extends Acharya and Naqvi’s (2012) theory of liquidity-driven risk-taking to digital asset markets by examining the relationship between U.S. and Chinese excess-liquidity conditions and cryptocurrency returns. Using monthly panel data for ten major cryptocurrencies from 2019 to 2024, and defining excess liquidity and economic policy uncertainty (EPU) as binary state indicators, the baseline results show that periods of U.S. excess liquidity are associated with a 12.1 percentage-point increase in average monthly cryptocurrency returns. This liquidity-return premium is reduced by approximately 54% during episodes of rising U.S. EPU. Chinese excess-liquidity regimes are associated with a 9.3 percentage-point increase in monthly returns, but this positive association is more than offset under rising Chinese policy uncertainty, as indicated by a −13.8 percentage-point interaction effect. These findings are consistent with the interpretation that surplus-liquidity conditions coincide with stronger cryptocurrency returns, in line with risk-taking and stablecoin-based arbitrage channels, whereas rising-EPU regimes weaken the liquidity-return relationship by increasing risk aversion and reducing arbitrage efficiency. The results highlight a macro-financial channel through which liquidity conditions are linked to digital asset markets and suggest that regulators should monitor stablecoin issuance, leverage, funding conditions, and liquidity-driven speculative pressure in the crypto market.
This study examines how the introduction of China's deposit insurance system affects bank risk-taking, using panel data on 117 commercial banks from 2010 to 2023. Employing a theoretical framework together with system GMM and difference-in-differences estimations, we find that deposit insurance does not uniformly enhance stability; instead, it may increase idiosyncratic risk by weakening market discipline. The effect is concentrated among local commercial banks, with large commercial banks showing comparatively limited responses. Corporate governance and financial leverage serve as important transmission channels: banks with more concentrated ownership or higher leverage exhibit stronger moral hazard incentives following the reform. Robustness tests using the provision coverage ratio confirm these patterns. Overall, the results highlight the heterogeneous impact of deposit insurance across bank types and underscore the importance of governance quality and capital structure in mitigating risk-taking incentives under explicit insurance schemes.
This paper examines how temperature anomalies affect the labor market in South Korea, with a particular focus on differences across employment types as well as socio-demographic characteristics. Korea offers an informative setting to study labor market resilience to temperature anomalies, given its strong seasonality and segmented labor market structure. We find pronounced heterogeneity in labor market responses across employment types: regular workers exhibit limited sensitivity, whereas non-regular and non-wage workers respond strongly. These responses have intensified over time, highlighting the growing macroeconomic relevance of climate variability. We also uncover differences across socio-demographic groups, mainly for negative temperature anomalies. Our findings indicate that temperature anomalies interact with both Korea’s segmented labor market structure and worker characteristics and point to the growing importance of climate-responsive labor policies.
This study provides the first investigation of the joint contributions of loan supply and demand shocks, together with housing market shocks, on housing loan expansion and housing prices. A 6-variate structural vector-error correction model is specified with identification of the shocks achieved by a combination of short- and long-run restrictions, and restrictions arising from the presence of cointegration. An important feature of the model is the identification of a full set of shocks across loan, housing, goods and money markets, including the identification of supply and demand shocks in the loan market. Using quarterly Finnish data from 1985 to 2024, the empirical results show that both loan supply and demand shocks can influence financial stability by significantly affecting housing loan expansion and housing prices over the short and mid term. The findings further indicate that housing price movements are more likely to respond to loan market shocks rather than to cause loan expansion. Implications for Europe through the lens of the Finnish market of the Russian war of aggression in Ukraine are also investigated.
With rising public attention to climate change, the proliferation of green mutual funds reflects expectations that they will contribute to a sustainable economic transition. This paper investigates the effects of climate news on mutual fund flows and portfolio allocation decisions. Using detailed flow- and holding-level data, we observe that heightened climate news results in significantly larger capital inflows into green funds than into their non-green counterparts. Furthermore, we show that, in response to climate news, green funds decrease their exposure to high-polluting firms relative to low-polluting firms more than non-green funds do. These results suggest that increasing public attention boosts capital reallocation towards green funds and that, in turn, potentially fosters investment relocation towards more environmentally friendly companies.
Brexit’s negotiations allow us to test whether investor confidence in government policy fluctuates during prolonged uncertainty. We identify 15 major Brexit events from the 2016 referendum through full implementation in 2021 and create a market-based investor-trust metric: the correlation between UK sovereign and corporate Credit Default Swap (CDS) spreads. Higher correlations signal stronger alignment of government and corporate risk premia and greater confidence in the government’s Brexit strategy; lower correlations indicate reduced trust and greater exposure to global factors. Using an event study within a Difference-in-Differences framework comparing UK and European firms, we show that confidence rises after credible government actions and falls after fragmentation or delays.
We develop a model of banking competition where there is a partition between passive depositors who always deposit funds at the same bank and active depositors who can observe and act on all deposit rates in the market. This partition leads to two opposite business models where banks choose either to be (i) a monopolistic bank and serve only passive depositors or (ii) a competitive bank and also serve active depositors. Prudential regulation needs to account for its impact on the relative attractiveness of these two business models. We show that this additional effect, of banks switching between business models, can offset the traditional impact of capital requirements, in that an increase in capital requirements can trigger an intensification of competition, which in turn can increase overall risk-taking. Similarly, the imposition of a deposit-rate ceiling may render the competitive business model comparatively more appealing. We also show that in this situation the introduction of shadow banks has the potential to reduce rather than increase overall risk-taking.
Miners of proof-of-work networks like Bitcoin tend to gravitate towards regions with cheap energy. We analyze risks associated with this geographical centralization by exploiting a local electricity supply shock. Compared to a control group consisting of an energy-efficient proof-of-stake cryptocurrency, the blockchain's capacity for processing transactions decreases while transaction fees increase substantially. The increased settlement latency on the blockchain also reduces secondary market quality as seen in higher exchange rate volatility, lower liquidity, and larger price differences between exchanges. Overall, our results suggest that geographical centralization poses short-lived but potentially severe system-wide risks to proof-of-work networks.
In this work, we focus on scenarios where dollar-denominated sovereign debt remains substantial. This presents a significant challenge to EME sovereign debt sustainability, particularly in the face of U.S. monetary policy tightening. We construct a two-country monetary general equilibrium model and a small open economy with infinite-horizon extension to evaluate the effects of debt restructuring of EMEs. Our findings suggest benefits of equilibrium sovereign default: we demonstrate that the role of the nominal exchange rate and state-contingent monetary policy in absorbing shocks is limited in a dollarized environment because of the trade-off between relieving the external debt burden and maintaining domestic growth; in contrast, sovereign debt restructuring can effectively help EMEs smooth consumption both across states and time, stabilize nominal exchange rates, and reduce the level of dollar-denominated debt. Moreover, we establish that the contemporaneous use of regulatory policy, with a more lenient debt restructuring policy and contractionary domestic monetary policy, is complementary and yields welfare benefits. Finally, our empirical evidence further supports these theoretical findings.
By analyzing a sample of US and European listed banks over the years 2015-2022, we investigate the relationship between greenwashing behavior and systemic risk. We use a measure of greenwashing that considers the consistency of what banks disclose with what they actually do to address ESG-related issues. We find that engaging in greenwashing practices contributes to undermining financial stability, with a rise in systemic risk which is exacerbated for less efficient and larger banks. Market seems to acknowledge a superior informative value to banks' actual ESG performance, giving less importance to what they disclose. Finally, a better performance in each of the environmental, social and governance dimensions reduces systemic risk, but only a bank's commitment in addressing environment-related issues seems to moderate the contribution of greenwashing to financial system fragility.
Using comprehensive regulatory intensity metrics from 1993 to 2019, we document that increased regulatory burden significantly reduces stock liquidity in U.S. public firms. To establish causality, we exploit exogenous variation in regulatory intensity following state ruling party changes. This identification strategy confirms that the negative relationship is causal rather than merely correlational. Our analysis reveals that information asymmetry serves as the primary mechanism, as regulatory intensity increases uncertainty about firms' future operations, exacerbating information asymmetry between investors and companies. The liquidity deterioration is particularly pronounced for firms with higher investment irreversibility, greater financial constraints, and those without government customers. These findings contribute to understanding how regulatory burdens affect market functioning.
This study uses a quasi-natural experimental research design exploiting the Dutch Liquidity Balance Rule (LBR) to evaluate the impacts of liquidity regulation on bank-level stability and systemic risk. Our findings show that following the introduction of the LBR, the stability of Dutch banks increases significantly relative to counterparts in neighboring countries unaffected by the regulation. The observed reduction in risk stems from improved capitalization and reduced leverage, which contribute to greater financial stability. Systemic risk also decreases. Dutch banks' vulnerability to systemic stress declines significantly, along with expected capital shortfalls, and their potential to transmit distress through the financial system diminishes. Our findings have relevance for policymakers tasked with implementing and monitoring the impacts of similar forms of liquidity regulation (such as bank liquidity coverage ratios) post global financial crisis. Specifically, adding liquidity regulation to preexisting regulations is successful in mitigating risks that could propagate beyond the financial sector, and disrupt the real economy.
We build a micro-level model that combines contagion dynamics with evolutionary game theory. Guided by this framework, we use large language models to analyze more than 80 million Chinese social media posts and examine the effect of investor sentiment divergence on stock liquidity. We find that investor sentiment divergence enhances stock liquidity by stimulating noise trading, attracting market attention, and reducing information efficiency, but at the cost of heightened crash risk. Extending the analysis to a three-dimensional disclosure perspective, we show that faster disclosure amplifies the liquidity effect only during periods of high divergence, higher-quality disclosure consistently mitigates it, while disclosure quantity has little influence. Additional evidence reveals a pronounced & quot;Monday effect & quot; and a weakening impact under tighter short-selling constraints. Overall, our study uncovers the mechanisms through which sentiment divergence shapes liquidity in an emerging market and underscores the implications for financial stability, highlighting how different dimensions of disclosure moderate these effects.
This paper examines the impact of borrower-based macroprudential policy tightening on mortgage lending in Slovakia, focusing in particular on the role of loan mediation via financial advisors in shaping loan characteristics. Using a comprehensive loan-level dataset from Slovak banks, we analyze the effects of key regulatory tools, Loan-to-Value (LTV) and Debt-to-Income (DTI) limits, on mortgage risk profiles. Our contributions include: (i) showing that restrictive borrower-based measures (BBMs) reduce the riskiest loans but push lower-risk segments towards regulatory thresholds, thus reshaping the risk profile of the mortgage loan portfolio; (ii) demonstrating that loans mediated through financial advisors tend to have higher amounts, LTVs, DTIs, and longer maturities; and (iii) identifying significant front-loading behavior following policy tightening announcement, particularly for loans mediated through advisors. These findings highlight the importance of detailed micro-level data in capturing policy effects and informing more effective macroprudential regulation.
This study analyzes the evolution of climate-risk discourse in banking using 4887 news articles (2008-2024) collected from ProQuest. We apply Natural Language Processing and add two novel layers: (i) an event-alignment analysis that links coverage dynamics to dated policy and supervisory milestones, and (ii) a discourse-network analysis connecting banks and regulators. We document a marked post-2020 shift, with ESG emerging as the dominant framing (7860 mentions) alongside persistent geographic asymmetries (U.S.-led coverage) and uneven sectoral engagement (Risk Management highest salience; Fintech lowest). Sentiment skews positive (similar to 4000 positive vs. similar to 1500 negative), and topic modeling identifies eight stable thematic clusters spanning operations, ratings, ESG assessment, disclosures, and market instruments. Event alignment shows media attention is typically anticipatory (median peak two months before an anchor), with COP26 producing a sustained level shift (+100% within a +/- 6-month window) and the Bank of England's CBES results generating the largest single spike (210 articles), whereas some 2022 rule-making announcements (e.g., SEC climate-disclosure proposal) exhibit sharper but less durable attention. The discourse network centers on two regulatory hubs (the Federal Reserve and the ECB) with key banks (e.g., Citigroup, JPMorgan, UBS) bridging into supervisory narratives. Collectively, the findings show climate risk becoming embedded in core banking practice while revealing structural, regional, and functional asymmetries that matter for policy design and implementation.
