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

See all articles by Giovanni Covi

Giovanni Covi

European Central Bank (ECB); University of Verona

Date Written: October 18, 2015

Abstract

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

Covi, Giovanni, The Emerging Regulatory Landscape: A New Normal Breaking the Link between Banks and Sovereigns (October 18, 2015). Journal of Banking Regulation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2735170

Giovanni Covi (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Verona ( email )

Via dell'Artigliere, 8
Verona, 37129
Italy

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