The Emerging Regulatory Landscape: A New Normal Breaking the Link between Banks and Sovereigns
Journal of Banking Regulation, Forthcoming
26 Pages Posted: 20 Feb 2016 Last revised: 23 Feb 2016
Date Written: October 18, 2015
The study provides an insight on the regulatory requirements banks have been complying with since the Financial Crisis of 2009. It focuses upon the Bank Recovery and Resolution Directive’s forthcoming full implementation and its effectiveness. An empirical analysis on the European banks’ CDS market will shed light on the mechanisms driving its current and historical evolution, emphasizing the motivations for the change in the regulatory architecture. The policies will be proved to be effective in affecting investors’ risk perception that is, a shift of risk burden from senior bondholders towards subordinated debt holders, as well as a breach of the link between banks and sovereigns’ default probabilities, the so-called doom loop. Ultimately a comparative analysis on banks’ total capital, return on equity, leverage and risk weighted assets provides evidence on the impact regulations have on the European banks’ business strategies, thereby shaping the New Normal. In conclusion the paper discusses if the current regulatory regime will be enough to prevent future sources of instability.
Keywords: Financial Stability, Systemically Important Financial Institutions, Financial Crisis, Banking Regulation
JEL Classification: E58, G01, G18, L51
Suggested Citation: Suggested Citation