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on Regulation |
| By: | Pollitt, M. G. |
| Abstract: | This paper explores the concept of scale within the future electricity sector. First, we discuss the theory and evidence behind economies of scale and scope and how they might apply to firm sizes within the electricity supply sector. Next, we consider how the governance of the electricity sector might influence firm scale. Finally, we explore how the nature of what is required to get to net zero might shape firm scales. Overall, we suggest that decentralisation trends within the electricity sector do not clearly imply that large firms will become less significant in a net zero electricity sector. |
| Keywords: | Scale, Scope, Governance, Net Zero, Decentralisation |
| JEL: | L94 |
| Date: | 2025–03–15 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2513 |
| By: | John M. Barrios; Filippo Lancieri; Joshua Levy; Shashank Singh; Tommaso Valletti; Luigi Zingales |
| Abstract: | We study how conflicts of interest (CoI)—defined as financial, professional, or ideological stakes held by authors—affect perceived credibility in economics research. Using a randomized controlled survey of both economists and a representative sample of the U.S. public, we find that the presence of a CoI reduces trust in a paper’s findings by 28% on average, with substantial heterogeneity across conflict types. We develop a model in which this reduction in trust reflects both the prevalence of conflicted papers and the expected bias conditional on conflict. To isolate the latter, we introduce the CoI Discount: the perceived value of a conflicted paper relative to an otherwise identical, non-conflicted one. We estimate an average CoI Discount of 39%, implying that conflicted papers are valued at just 61% of non-conflicted ones. We validate these survey-based estimates through three complementary exercises: an empirical analysis of actual citation and disclosure patterns in economics, a meta-analysis of evidence from the medical literature, and simulations using large-language models. Our findings highlight a persistent credibility gap that is not eliminated by current disclosure practices and suggest a broader challenge for scientific trust in the presence of author conflicts. |
| JEL: | A11 A14 B59 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33645 |
| By: | Joshua S. Gans |
| Abstract: | This paper examines how the introduction of artificial intelligence (AI), particularly generative and large language models capable of interpolating precisely between known data points, reshapes scientists' incentives for pursuing novel versus incremental research. Extending the theoretical framework of Carnehl and Schneider (2025), we analyse how decision-makers leverage AI to improve precision within well-defined knowledge domains. We identify conditions under which the availability of AI tools encourages scientists to choose more socially valuable, highly novel research projects, contrasting sharply with traditional patterns of incremental knowledge growth. Our model demonstrates a critical complementarity: scientists strategically align their research novelty choices to maximise the domain where AI can reliably inform decision-making. This dynamic fundamentally transforms the evolution of scientific knowledge, leading either to systematic “stepping stone” expansions or endogenous research cycles of strategic knowledge deepening. We discuss the broader implications for science policy, highlighting how sufficiently capable AI tools could mitigate traditional inefficiencies in scientific innovation, aligning private research incentives closely with the social optimum. |
| JEL: | D82 O30 O34 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33566 |
| By: | Volker Nocke; Andrew Rhodes |
| Abstract: | This paper studies optimal merger remedies when an antitrust authority has a consumer surplus standard. Remedies are modeled as asset divestitures which make the firm receiving the assets more efficient, at the expense of the merged firm. If a merger affects only a single market, asset divestitures on their own are not sufficient for the merger to be implemented--synergies are also required. As the market becomes less competitive, it is less likely that any merger is implemented; conditional on implementing one, it is more likely that divestitures are used to create a new competitor. If instead a merger affects several different markets, and the authority cares about consumer surplus aggregated over all markets, then it is optimal to divest as many assets as feasible in some markets and no assets in all remaining markets. The optimal merger proposal is more likely to entail divestitures in more competitive markets. |
| Keywords: | Horizontal mergers, divestitures, Cournot, merger control |
| JEL: | L13 L40 D43 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_680 |
| By: | Roxana Mihet (Swiss Finance Institute - HEC Lausanne); Kumar Rishabh (University of Lausanne - Faculty of Business and Economics (HEC Lausanne); University of Basel, Faculty of Business and Economics); Orlando Gomes (Lisbon Polytechnic Institute - Lisbon Accounting and Business School) |
| Abstract: | Artificial intelligence (AI) is transforming productivity and market structure, yet the roots of firm dominance in the modern economy remain unclear. Is market power driven by AI capabilities, access to data, or the interaction between them? We develop a dynamic model in which firms learn from data using AI, but face informational entropy: without sufficient AI, raw data has diminishing or even negative returns. The model predicts two key dynamics: (1) improvements in AI disproportionately benefit data-rich firms, reinforcing concentration; and (2) access to processed data substitutes for compute, allowing low-AI firms to compete and reducing concentration. We test these predictions using novel data from 2000–2023 and two exogenous shocks—the 2006 launch of Amazon Web Services (AWS) and the 2017 introduction of transformer-based architectures. The results confirm both mechanisms: compute access enhances the advantage of data-intensive firms, while access to processed data closes the performance gap between AI leaders and laggards. Our findings suggest that regulating data usability—not just AI models—is essential to preserving competition in the modern economy. |
| JEL: | L13 L41 O33 D83 E22 L86 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2537 |
| By: | Pablo D. Azar; Adrian Casillas; Maryam Farboodi |
| Abstract: | In our previous Liberty Street Economics post, we introduced the decentralized finance (DeFi) intermediation chain and explained how various players have emerged as key intermediaries in the Ethereum ecosystem. In this post, we summarize the empirical results in our new Staff Report that explains how the need for transaction privacy across the DeFi intermediation chain gives rise to intermediaries’ market power. |
| Keywords: | financial intermediation; market power; decentralized finance |
| JEL: | G23 D82 L14 L22 G14 D43 |
| Date: | 2025–04–21 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fednls:99874 |
| By: | Eric Darmon; Thomas LE TEXIER; Zhiwen LI; Thierry Pénard |
| Abstract: | Antitrust authorities are concerned with the dominant market position of Tech Giants such as Google, Meta, or Amazon. These digital conglomerates are characterized by platform-based business models and multimarket contact (MMC). In traditional one-sided markets, theory and empirical evidence show that MMC tends to relax competition. In this paper, we revisit this result in the context of platform competition with competitive bottleneck and cross-market externalities, and provide new insights into the impact of MMC on platform competition. In this context, when platforms charge the two groups of users (bilateral pricing), we find that MMC always decreases the profitability of platforms regardless of the nature and magnitude of cross-market externalities. Then we consider the case in which platforms can only charge one group of users (unilateral pricing). When platforms charge the side on which they are not directly competing for users (i.e. the side that is not the competitive bottleneck), MMC may relax competition only if cross-group externalities and cross-market externalities are both sufficiently small. From a competition policy perspective, our paper provides insights into how antitrust authorities should review conglomerate mergers in digital markets and assesses the effects of the diversification strategies of digital platforms in the context of cross-market externalities and competitive bottleneck. |
| Keywords: | two-sided markets, platform competition, digital markets, multimarket contact, cross-market externalities, competitive bottleneck, competition policy |
| JEL: | D43 L13 L41 L86 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2025-22 |
| By: | Ahmed, Bruktawit (Missouri University of Science and Technology); Fikru, Mahelet G (Missouri University of Science and Technology) |
| Abstract: | This study examines the impact of carbon capture and storage (CCS) on electricity prices, an essential aspect of decarbonization in the power sector. While prior research has analyzed CCS's economic feasibility and environmental implications, the direct effects on electricity prices remain largely unaddressed. This study employs a profit-maximization model within a Cournot oligopoly framework, integrating Monte Carlo simulations to evaluate how production costs, policy incentives, and energy demand influence the percentage of carbon captured by power generators and the resulting electricity prices. The analysis incorporates key factors such as carbon taxes, renewable energy, and CCS subsidies, production and abatement costs, and consumer preferences for greener energy. The findings suggest that when mixed-asset power generators optimize carbon abatement to maximize profits, the relationship between the percentage of carbon captured and electricity prices varies by energy source. Carbon capture can lower non-renewable electricity prices to a certain threshold, driven by net benefits from CCS subsidies and tax-saving effects. In contrast, the price of greener electricity sees a modest increase due to the net costs of shifting production from renewable to non-renewable assets. Despite this, renewable electricity remains the more cost-effective option for consumers. Additionally, the result from the Monte Carlo simulations reveals that policy parameters, particularly CCS subsidies, effectively incentivize carbon capture but may also shift production dynamics, leading to nuanced effects on electricity pricing. For example, the study shows that with mixed-asset power generation, the price of non-renewable electricity could be higher than greener electricity, where higher CCS subsidies could drive up renewable electricity prices while lowering non-renewable electricity prices. These findings have important implications for energy policymakers. While CCS adoption is essential for reducing emissions, its potential to impact electricity prices presents affordability concerns, especially in price-sensitive markets. These shifts in price signals could disrupt price stability, making it challenging to ensure equitable energy access. Therefore, policymakers must carefully balance CCS incentives with support for renewable energy to avoid unintended price distortions. Within a well-designed framework that assesses price impacts, policymakers could encourage a hybrid energy strategy that facilitates the transition to renewables while leveraging carbon capture as a bridging solution. In this regard, future studies should explore the long-term effects of CCS on electricity price volatility, further examining how different market structures, regulatory environments, and technological advancements can mitigate or exacerbate price fluctuations, ultimately contributing to more sustainable and equitable energy systems. Future research could also incorporate heterogeneous firm behavior and dynamic investment decisions to refine the understanding of CCS pricing effects further. |
| Date: | 2025–03–05 |
| URL: | https://d.repec.org/n?u=RePEc:osf:osfxxx:saqhf_v1 |
| By: | Leonardo Bursztyn (University of Chicago & NBER); Matthew Gentzkow (Stanford University & NBER); Rafael Jiménez-Durán (Bocconi University, IGIER, CESifo, & Chicago Booth Stigler Center); Aaron Leonard; Filip Milojević (University of Chicago); Christopher Roth (University of Cologne, NHH Norwegian School of Economics, Max Planck Institute for Research on Collective Goods, CESifo, & CEPR) |
| Abstract: | Market definition is essential for antitrust analysis, but challenging in settings with network effects, where substitution patterns depend on changes in network size. To address this challenge, we conduct an incentivized experiment to measure substitution patterns for TikTok, a popular social media platform. Our experiment, conducted during a time of high uncertainty about a potential U.S. TikTok ban, compares changes in the valuation of other social apps under individual and collective TikTok deactivations. Consistent with a simple framework, the valuations of alternative social apps increase more in response to a collective TikTok ban than to an individual TikTok deactivation. Our framework and estimates highlight that individual and collective treatments can even lead to qualitatively different conclusions about which alternative goods are substitutes. |
| Keywords: | Markets, Network Goods, Coordination, Collective Interventions |
| JEL: | D83 D91 P16 J15 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:363 |
| By: | Brown, Christina Estela; Tanner, Sophia J.; Hrozencik, R. Aaron; Gramig, Benjamin M. |
| Abstract: | Water is an essential resource that sustains not only agriculture and human communities but also the natural environment. It provides a suite of ecosystem services, such as recreation and habitat for wildlife, that affect the well-being of the public. However, the use and allocation of water involve tradeoffs, especially in the context of competing demands and limited availability. This report presents a targeted review of the economics literature on the economic value of water for agriculture and environmental flows, leveraging both observed behavior and survey methods. It examines the economic implications of these tradeoffs, with a focus on environmental and resource economics, energy economics, and applied econometrics. The report also highlights the challenges and opportunities associated with measuring the economic value of water, including the complexity of the systems involved, the heterogeneity of preferences and behaviors, and the uncertainty of water availability. |
| Keywords: | Environmental Economics and Policy, Land Economics/Use, Resource/Energy Economics and Policy |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:ags:uersib:356606 |
| By: | Maggie E.C. Jones; Trevon D. Logan; David Rosé; Lisa D. Cook |
| Abstract: | This paper studies consumer discrimination while taking into consideration the role of competition between firms, providing one of the first large-scale comprehensive analyses of consumer discrimination and market forces. We formally model consumer discrimination, where some majority-group members dislike consuming alongside minorities. In equilibrium, the non-discriminatory-to-discriminatory firm ratio is proportional to the minority-to-majority consumer ratio. Empirically, we examine how local changes in the composition of consumers altered business incentives to discriminate during the decades leading up to the passage of the Civil Rights Act of 1964. Using a nationwide data source of non-discriminatory businesses in three different industries and a research design that leverages two sources of exogenous variation in the ratio of Black-to-White consumers, we find that increases in non-discrimination were concentrated in the least competitive markets, where the threat of defection by White consumers to competing firms was lowest. We assemble new data on over 25, 000 prices charged at establishments by discriminatory status and show that non-discriminatory firms charged higher prices than discriminatory firms in the same local market. Consistent with our theoretical model, this finding arises because the effects of greater competition among the more numerous discriminatory firms outweighed the discrimination markup. The results imply that monopoly power blunted the influence of consumer preferences and that Black consumers were harmed through higher prices in the non-discriminatory market. |
| JEL: | L11 L83 N32 N82 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33547 |
| By: | Jun Nakabayashi; Juan M. Ortner; Sylvain Chassang; Kei Kawai |
| Abstract: | Auctioneers suspecting bidder collusion often lack the formal evidence needed for legal recourse. A practical alternative is to design auctions that hinder collusion. Since Abreu et al. (1986), economic theory has emphasized imperfect monitoring as a constraint on collusion, but evidence remains scarce on whether: (i) information frictions meaningfully limit real-world collusion; and (ii) auctioneers can effectively exploit these frictions. Indeed, transparency concerns often prevent the introduction of explicit randomness in auction design. We make progress on this issue by studying the impact of subjective scoring in auctions run by Japan’s Ministry of Land, Infrastructure, and Transportation. The adoption of scoring auctions significantly reduced winning bids in ways inconsistent with competition. Model-based inference suggests that the cartel’s dynamic obedience constraints were binding and were tightened by imperfect monitoring. Subjective scoring can successfully leverage imperfect monitoring frictions to reduce the scope of collusion. |
| JEL: | C57 C72 D44 L41 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33668 |
| By: | Ayres, Ian; Lingwall, Jeff; Steinway, Sonia |
| Abstract: | Analyzing a new dataset of 110, 000 consumer complaints lodged with the Consumer Financial Protection Bureau (the "CFPB" or the "Bureau"), the authors find that: (i) Bank of America, Citibank, and PNC Bank were significantly less timely in responding to consumer complaints than the average financial institution; (ii) consumers of some of the largest financial services providers, including Wells Fargo, American Express ("Amex"), and Bank of America, were significantly more likely than the average consumer to dispute the provider's response to their initial complaints; and (iii) among the companies included in the database that provide mortgages, OneWest Bank, HSBC, Nationstar Mortgage, and Bank of America all received more mortgage complaints relative to mortgages sold than other mortgage providers. In addition, regression analysis suggests that consumer financial companies respond differently to complaints, depending on the type of product and issues involved, thereby generating significant differences in the timeliness of responses and whether consumers dispute those responses. Moreover, demographics matter: mortgage complaints per mortgage significantly increased in ZIP codes with larger proportions of certain populations, including Blacks and Hispanics. Companies were also less timely, and more likely to have their responses disputed, in areas with higher concentrations of senior citizens and college students, groups on which the CFPB is mandated to focus. |
| Date: | 2025–04–28 |
| URL: | https://d.repec.org/n?u=RePEc:osf:lawarc:usxmh_v1 |
| By: | Shagun Tripathi; Georgios Petropoulos; Harris Kyriakou |
| Abstract: | In recent years, several automated caps, or algorithmic quantity regulations (AQRs), have been deployed to police supply conditions in sharing economy platforms. AQRs constitute a paradigm shift in platform regulation, as they enable exhaustive, and low-cost enforcement, thus comprehensively influencing interactions both within and outside the focal platform. However, their actual impact is not known, and has not been studied so far. In this work, we employ a series of difference-in-differences analyses to provide causal evidence on the impact of AQR both within, as well as outside a focal sharing platform - Airbnb. First, within Airbnb, we find that the quality of platform offerings was negatively affected after the introduction of an algorithmic quantity regulation - marked by 6% decline in ratings. Additionally, we find that the AQR affected certain platform participants disproportionately. Providers without organic and designated trust building signals, i.e., inexperienced hosts and non-superhosts, bore the cost of the AQR, ending up worse off than their counterparts. Second, we find that the occupancy rates of providers in the competing platform Vrbo declined by 3.6% as a result to Airbnb’s AQR. Third, we find a reduction in housing prices by 0.402 units after the introduction of the AQR. This research provides novel empirically grounded insights on the implications of AQRs that can shape the future of sharing economy platforms’ regulation. |
| Keywords: | sharing platforms, algorithmic quantity regulation, anticipatory effect, spillover effect, causal inference. |
| JEL: | L51 L86 R31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11811 |
| By: | Gu, Wulong |
| Abstract: | Despite their good intent, regulations and their accumulation over time impose real costs to businesses and may have a negative impact on economic growth and competitiveness. Accurately measuring these costs and benefits is important for understanding if regulations are achieving their desired results. This paper uses a new, modelled, measure of regulatory burden developed by KPMG and Transport Canada to inform about the possible overall impact of the changing number of regulations faced by firms on Canadian economic activity. Measuring regulatory burden is complex, and there is not a consensus on the best approach. The novel Transport Canada – KPMG measure is based on counting the number of regulatory provisions in Federal legislation and is one of several aggregate measures of regulatory burden available. It shows that regulatory requirements in Canada rose 2.1% per year from 2006 to 2021. A measure from the US based Mercatus Center that is not as broadly defined showed an increase in the number of provisions rising 1.1% per year over the same period while the OECD measure of product market regulation (PMR) that tracks the stringency, rather than the number, of regulations declined. Using the newly developed Transport Canada – KPMG measure, regression estimates show that regulatory accumulation from 2006 to 2021 is associated with a decline in gross domestic product (GDP) growth by 1.7 percentage points and reduced employment growth by 1.3 percentage points in the business sector. A smaller decline on labour productivity of 0.4 percentage points was also estimated. The business sector investment growth was lowered by an estimated 9.0% (with the effect being bigger for small firms than for large firms) for the period 2006 to 2021 and that regulatory accumulation is associated with lower business entry and exit rates. Understanding economy wide costs and benefits from regulations is challenging. The results of the study provide a first indication for Canada of the estimated impacts of the changing number of regulations over time on businesses. While the results of the study point to potentially important costs for the economy, it is not meant to reflect a full economic assessment of the benefits of regulations nor economic impacts associated with not introducing regulations. |
| Keywords: | Business, Economic Growth, Regulatory Accumulation, Economic impacts, Business Dynamism |
| JEL: | J23 M21 |
| Date: | 2025–02–10 |
| URL: | https://d.repec.org/n?u=RePEc:stc:stcp3e:2025002e |
| By: | Scott A. Carson |
| Abstract: | Quad O is the Environmental Protection Agency (EPA)’s methane reduction regulation that requires greater producer efficiency when methane is extracted by requiring efficient upstream, midstream, and downstream equipment. There are various times when Quad O was implemented and updated, and August 11th, 2012 was the first implementation period. Quad O’s second implementation was on January 1st, 2015, and this study evaluates oil and gas returns around Quad O’s early 2015 regulatory change. Oil and gas returns were mostly unaffected by the second Quad O implementation, indicating it is difficult to identify when firm returns responded to regulatory change. Equity to commodity markets interacted for each firm’s return. Exploration & production equity to Brent crude ratios are among the lowest commodity market risk in the industry. In contrast, equity and commodity markets place the next highest equity to commodity ratios to mid and downstream transportation & pipeline and refining & marketing firms, indicating comparative commodity to equity risk was higher closer to oil and gas extraction. |
| Keywords: | environmental protection agency, regulation, quad-o, methane. |
| JEL: | L50 L51 L52 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11821 |
| By: | Eliseo Curcio |
| Abstract: | This study evaluates ethanol blending as a practical near-term strategy for significant transportation decarbonization in the United States. Despite rapid growth in electric vehicle adoption, gasoline is projected to remain dominant, with annual demand around 135 billion gallons by 2035, necessitating immediate complementary solutions. Analysis indicates ethanol use will notably expand, driven by regulatory incentives such as RFS Renewable Identification Numbers (RINs) and IRA tax credits (45V), leading to potential market penetration of E15 at about 25% and E85 also expanding substantially. Ethanol derived from waste achieves notably lower carbon intensity at approximately 58.34 gCO2e/MJ, substantially better than conventional gasoline (~92 gCO2e/MJ), providing clear environmental advantages. Economic assessments show robust investor returns and local economic growth driven by policy incentives, including Renewable Identification Numbers (RINs) and IRA tax credits (45V). Infrastructure analysis confirms manageable costs and feasible adjustments for widespread adoption of higher ethanol blends. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2504.06278 |
| By: | Leonardo Bursztyn; Rafael Jiménez-Durán; Aaron Leonard; Filip Milojević; Christopher Roth |
| Abstract: | Firms can increase the demand for their products and consolidate their market power not only by increasing user utility but also by decreasing non-user utility. In this paper, we examine this mechanism by considering the case of smartphones. In particular, Apple has faced criticism for allegedly degrading the Android user experience by making messages to Android devices appear as green bubbles on iPhones—a salient signal often perceived as reflecting a lower socioeconomic status. Using samples of US college students, we show that green bubbles are widely stigmatized and that a majority of both iPhone and Android users would prefer green bubbles to no longer exist. We then conduct an incentivized deactivation experiment, revealing that iPhone users have a significant willingness to pay to prevent their messages from appearing as green bubbles on other iPhones. Next, we examine the market implications of non-user utility and find that respondents are substantially more likely to choose an Android over an iPhone when green bubbles are removed. We conclude by presenting case studies that illustrate how companies use product features to reduce non-user utility in various markets. |
| JEL: | D83 D91 J15 P16 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33642 |
| By: | Nicholas A. Carollo; Jason F. Hicks; Andrew Karch; Morris M. Kleiner |
| Abstract: | The analysis of occupational licensing has concentrated largely on its labor market and consumer welfare effects. By contrast, relatively little is known about how occupational licensing laws originated or the key factors in their evolution. In this paper, we study the determinants of U.S. licensing requirements from 1870 to 2020. We begin by developing a model where licensing arises as an endogenous political outcome and use this framework to study how market characteristics and political incentives influence regulators’ choices. Our empirical analysis draws on a novel database tracking the initial enactment of licensing legislation for hundreds of unique occupations, as well as changes to the specific qualifications required to obtain a subset of licenses over time. We first show that, consistent with the predictions of our model, licensing requirements are more common and were adopted earlier for occupations whose tasks plausibly pose some risk to consumers. Second, large, urbanized states are significantly more likely to produce new policies. Third, among occupations regulated before 1940, licensing requirements appeared earlier in states with more practitioners and where incumbent workers likely experienced greater labor market competition. After 1980, state-level factors are more strongly associated with the timing of policy adoption. Finally, political organization, as measured by the establishment of a state professional association, significantly increases the probability of regulation. Together, our findings suggest that both public and private interests have contributed to the diffusion of licensing requirements across states and occupations. |
| JEL: | J01 J29 J4 J44 J48 |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33580 |
| By: | Eric Cuijpers |
| Abstract: | This paper examines the role of regulation on how sovereign risk shocks affect bank balance sheets using a panel local projection approach and a newly created dataset of sovereign risk shocks for a sample of Eurozone banks. The empirical results show the existence of a regulatory precondition to sovereign risk transmission: banks that receive a favorable regulatory treatment in the form of a zero percent risk weight tend to increase home sovereign debt holdings and decrease lending in response to sovereign risk shocks. In contrast, comparable banks that face a stricter regulatory treatment, which requires them to calculate positive risk weights, do not exhibit this behavior. The results suggest that reforming the regulatory treatment of sovereign debt could mitigate the transmission of sovereign risk to bank balance sheets. |
| Keywords: | Banks; Government Policy and Regulation; Sovereign Debt |
| JEL: | G21 G28 H6 |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:dnb:dnbwpp:834 |
| By: | Carlo Altavilla (European Central Bank (ECB)); Cecilia Melo Fernandes (International Monetary Fund (IMF)); Steven Ongena (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Alessandro Scopelliti (KU Leuven, Department Accounting, Finance and Insurance; University of Zurich - Department Finance) |
| Abstract: | We assess how regulatory changes in bail-inable liability requirements, aimed at ensuring orderly resolution processes and minimizing taxpayer-funded bailouts, affect bank bond holdings. Using confidential data on banks' securities portfolios, we find that the introduction of the Minimum Requirements for Eligible Liabilities prompts banks to increase their holdings of eligible bank bonds issued by other banks, compared to non-eligible bonds. Similarly, the Total Loss-Absorbency Capacity requirements encourage banks to invest in eligible subordinated debt issued by global systemically important banks. Our findings also reveal a within-country concentration of bank bond holdings, which may pose challenges to effective bail-in implementation. |
| Keywords: | bank bonds, regulatory changes, bail-inable debt, MREL, TLAC |
| JEL: | G01 G21 G28 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2538 |