We review existing empirical research on the design and impact of regulation in the banking sector. The impact of each individual piece of regulation may inexorably depend on the set of regulations already in place, the characteristics of the banks involved (from their size or ownership structure to operational idiosyncrasies in terms of capitalization levels or risk taking behavior), and the institutional development of the country where the regulation is introduced. This complexity is challenging for the econometrician, who relies either on single country data to identify challenges for regulation or cross country data to assess the overall effects of regulation. It is also troubling for the policymaker, who has to optimally design regulation to avoid any unintended consequences, especially those that vary over the credit cycle such as the currently developing macroprudential frameworks.
Expected final online publication date for the Annual Review of Financial Economics Volume 7 is November 6, 2015. Please see http://www.annualreviews.org/catalog/pubdates.aspx for revised estimates.