Concetta Gigante is a PhD candidate in Economics at the University of Liverpool. She received the Economic and Social Research Council (ESRC) studentship working in partnership with the Bank of England. Concetta performed part of her research at the University of Wisconsin-Madison as part of her one year visit abroad.
Bank regulations ensure that banks remain financially sound and manage risks responsibly. When banks are highly profitable, they may take on excessive risks, which can strain their liquidity and cause failures. A single failure can spread quickly to other banks, undermining confidence and sparking wider crises that affect households and firms.
My PhD research examines regulations that set liquidity and capital requirements for banks. While the principles underlining regulations are the same for all banks, the rules usually apply differently to banks depending on their size and complexity. Banks are not the same: large and small banks face very different risks. Current models used to design regulations often fail to account for this diversity.
To address this gap, I developed models that consider the heterogeneous nature of banks and help to assess the quantitative importance of banks' regulations. Using numerical and computational methods, I test how regulations impact banks of different sizes and validate my models with real data through a wide variety of empirical methods.
Data and method
For my analysis, I used detailed data on U.S. commercial banks from the Federal Reserve Bank of Chicago. In one paper, "Heterogeneous Banks, Liquidity Risk and the Distribution of Banks' Liquidity," I focus on liquidity rules requiring banks to hold a minimum amount of liquid assets based on their deposits. These liquid assets help banks handle short-term mismatches and risks.
Empirical evidence shows that smaller banks, relative to their size, tend to hold more deposits than larger ones. This exposes them to greater liquidity risk. Regulations are designed to manage these risks, but they affect small and large banks differently. I built a theoretical model that explains this dynamics, which I call the negative sorting of banks by type.
This imbalance of liquidity between large and small banks shapes how liquidity is distributed across the system and its inequality. When liquidity is unevenly spread, the financial system becomes more vulnerable to crises. My model connects liquidity inequality, regulation, and the likelihood of crises. By linking liquidity requirements to the size of deposits, I can influence banks' short-term debt costs and their incentives to hold liquid assets.
I also examine the timing of implementation of banks' regulations: before a crisis (ex-ante) or after one occurs (ex-post). Each approach has different effects on costs, resilience, and the distribution of liquidity across banks. The design of the liquidity regulation I propose within the model that is connected to the size of banks can explain the expansion in banks' size through deposits.
Findings
My empirical work shows that after the 2007-2008 financial crisis, inequality in banks' liquid assets decreases by about 6.8%. Smaller and medium banks increase their liquid assets, while the largest banks lose a significant share-three times more than smaller banks at the top end of the distribution.
The quantitative results suggest that ex-ante regulations encourage large banks to build stronger liquidity buffers before a crisis hits. In contrast, ex-post regulations shift liquidity toward smaller banks after a crisis, reducing inequality but at a higher cost to the overall financial system.
The key takeaway is that while both approaches affect liquidity distribution, ex-ante regulations are more effective at strengthening resilience and reducing the severity of crises. Ex-post regulations can help rebalance liquidity but leave the system more exposed to initial shocks.
Why this matters
Designing better regulations contextually to the timing of implementation requires understanding how different banks respond to rules. My work highlights the role of precautionary behaviour and incomplete markets in shaping these responses. By modelling these features, we can better anticipate the outcomes of regulations and avoid unintended consequences.
What's next
My current research analyses how liquidity regulations influence banks' marginal propensity to lend-their willingness to extend loans. This matters because lending drives growth for firms and households. I am also studying how U.K. banks managed liquidity during the financial crisis to compare with the U.S. experience.
As banks face new challenges, including digital and technological innovations and regulatory pressures, it becomes even more important to design rules that protect financial stability without stifling growth. Stronger, more resilient banks support investment, business growth, and household security.
My ultimate aim is to provide tools and insights that help regulators design smarter policies. By understanding the diversity of banks and their behaviours, we can better safeguard the economic and financial system and ensure stability in times of stress.
To hear more about my research connect with me on LinkedIn Concetta Gigante and follow me on Bluesky @concettagigante
