Abstract
As a result of the Enron scandal, new regulations were enacted that increased the capital charge for holding assets in off-balance sheet vehicles. I utilize a triple difference specification to identify the effect of this exogenous regulatory shock on bank systematic risk exposure. I find that after the regulation, banks' exposure to off-balance sheet assets at vehicles with high systematic risk increases relative to vehicles with low systematic risk and relative to non-U.S. banks which are not affected by the regulation. These results suggest that capital regulation might have the perverse effect of concentrating systematic risk, potentially increasing the systemic risk of the financial system.
Published Version
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