Featured Product

    ECB Paper Analyzes Impact of Implementation of New Bail-In Regulations

    September 26, 2019

    ECB published a working paper that studies the impact of the introduction and implementation of the new bail-in regulations on the subordinated bond yield spreads against senior unsecured bonds. The study links the bond yield developments with the characteristics of issuing entities and the economic and financial environment. The results show that the tier 1 capital ratio makes subordinated debt safer and, therefore, less costly. The ratio of subordinated debt over total capital funds (in the balance sheet of banks) is positively correlated with the subordinated-senior bond spreads, which indicates that markets price the higher risk of banks with less stable sources of funding in their liability or capital structures. As expected, market conditions and economic environment variables also play a key role in explaining the bond spreads.

    The study shows that new Bank Recovery and Resolution Directive (BRRD) regime might have reduced the perception of risk of senior bondholders by providing early intervention tools and a framework that protects senior bonds relatively well against losses in case of failure. Other factors not necessarily attributable to the bail-in regime, such as the effects of the expansionary monetary policy measures or the Basel III implementation (enforcing the build-up of capital and de-risking processes), may have led to a general decline in both yields while keeping the spreads relatively constant. 

    The results also highlight that the characteristics of the institutions and the different reactions of each kind of bond should be taken into account when analyzing the changes or the implementation of the regulation. In this regard, the regressions show that after the introduction of the new bail-in regulation, there is a convergence between the bond yields of the global systemically important institutions (G-SIBs) and the non-G-SIBs, which could point out to a reduction in the perception of the so called “too big to fail” public implicit guarantee. Nonetheless, this convergence is largely driven by a decline in the bond yields of non-G-SIBs mainly from the second quarter of 2017 onward, and not by significant increases in the yields of bonds issued by G-SIBs.

    Unlike other studies, this work emphasizes the difference in the reactions of bond yields depending on their seniority after the entry into force and the implementation of the new bail-in regulation. This paper contributes to fill this analytical gap, but additional work on the implications of the new bail-in regulation is required. Funding costs and capital, among other factors, determine the financial strength of the banks and they are interconnected. Bond yields provide market information that should be considered when facing the withdrawal of monetary stimuli or possible changes in the economic and financial environment.

     

    Related Link: Working Paper (PDF)

     

    Keywords: Europe, EU, Banking, Securities, Bail-in Regime, Basel III, G-SIBs, Too Big to Fail, Systemic Risk, Regulatory Capital, BRRD, ECB

    Featured Experts
    Related Articles
    News

    EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation

    The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).

    May 23, 2022 WebPage Regulatory News
    News

    EBA Publishes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.

    May 23, 2022 WebPage Regulatory News
    News

    EIOPA Examines Physical Climate Risk Exposure, SII Non-Compliance

    The European Insurance and Occupational Pensions Authority (EIOPA) published a report assessing insurers' exposure to physical climate change risks

    May 20, 2022 WebPage Regulatory News
    News

    NGFS Report Explores Quantification of Climate Risk Differentials

    The Network for Greening the Financial System (NGFS) published two reports to aid central banks and regulators in their oversight of the financial sector and in their central bank operations

    May 19, 2022 WebPage Regulatory News
    News

    EC Publishes Results on Review of Web Accessibility Directive

    The European Commission (EC) published the results of a public consultation, held in October 2021, on the review of the Web Accessibility Directive.

    May 19, 2022 WebPage Regulatory News
    News

    MAS Consults on Adjustment Spreads for Conversion of SOR Contracts

    The Monetary Authority of Singapore (MAS) and the SC-STS are jointly consulting, until June 10, 2022, on setting adjustment spreads for the conversion of legacy SOR contracts to SORA reference rate.

    May 18, 2022 WebPage Regulatory News
    News

    OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities

    The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.

    May 17, 2022 WebPage Regulatory News
    News

    EBA Proposes Standards to Support Secondary NPL Markets

    The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.

    May 17, 2022 WebPage Regulatory News
    News

    EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution

    The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).

    May 13, 2022 WebPage Regulatory News
    News

    EBA Issues Standards for Crowdfunding Service Providers Under ECSPR

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.

    May 13, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8206