Beyond compliance: Decoding the time effects of banking regulations on credit risk in the EEA banks

Objective: The article aims to determine whether banks promptly react to risk-related regulatory changes or if there is a delayed response. Considering the complexities of the financial system, our study underscores the need to examine the time-sensitive impact of banking regulations on credit risk. Separating intricate dynamics, measuring responsiveness, and assessing compliance, we probe this research to find the assumptions for strengthening financial resilience in a dynamic landscape. Research Design & Methods: The research design in this study is quantitative. We collected the initial data through desk research, sourcing information from regulatory documents, financial reports, and other relevant documents related to banking supervision rules. We used a dynamic panel data model to analyse the collected data, specifically examining the relationship between regulatory changes and banks’ responses to these changes. The study’s sample size involves quantitative data from multiple banks over time, allowing for an assessment of regulatory pressure’s effects on credit risk and the tPime required for banks to achieve compliance. Findings: The article sheds light on how alterations in regulatory policies for risk influence the responsiveness of systemically important banks (SIBs). We explored how long it takes for banks to comply fully with regulatory changes regarding risk. The results show that the effects of regulatory pressure may be delayed more than conventional models suggest, even as much as two years, with potential consequences for the efficacy of regulatory interventions. Implications & Recommendations: The study results contribute to understanding the time dynamics of regulatory impacts on the banking sector, particularly concerning credit risk, and bring valuable insights into sustainable finance. It aids in identifying opportunities to align regulatory frameworks with sustainability objectives, and greater financial resilience. Policymakers and banks should invest in enhanced monitoring systems to track the time-sensitive responses of banks, primarily SIBs, to ensure regulatory interventions achieve their intended outcomes. Contribution & Value Added: This research revealed the timing and progression of banks’ responses to risk-related regulatory changes over time, offering valuable insights for policymakers and financial institutions. This alignment offers insights for fostering long-term financial stability and resilience.