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

    Regulators Fine Goldman Sachs for Risk Management Failures

    FCA and PRA in the UK, FED in the US, and the authorities in Singapore have fined Goldman Sachs for risk management failures in connection with the 1Malaysia Development Berhad (1MDB).

    October 23, 2020 WebPage Regulatory News
    News

    Canada Hosts International Conference of Banking Supervisors

    BCBS announced that OSFI and the Bank of Canada hosted the 21st International Conference of Banking Supervisors (ICBS) virtually on October 19-22, 2020.

    October 22, 2020 WebPage Regulatory News
    News

    FCA Proposes More Measures to Help Insurance Customers Amid Crisis

    FCA proposed guidance on how firms should continue to seek to help customers who hold insurance and premium finance products and may be in financial difficulty because of COVID-19, after October 31, 2020.

    October 21, 2020 WebPage Regulatory News
    News

    EBA Issues Opinion to Address Risk Stemming from Legacy Instruments

    EBA issued an opinion on prudential treatment of the legacy instruments as the grandfathering period nears an end on December 31, 2021.

    October 21, 2020 WebPage Regulatory News
    News

    ESRB Publishes Non-Bank Financial Intermediation Risk Monitor for 2020

    ESRB published the fifth issue of the EU Non-bank Financial Intermediation Risk Monitor 2020 (NBFI Monitor).

    October 21, 2020 WebPage Regulatory News
    News

    HM Treasury Publishes Policy Statement Amending Benchmarks Regulation

    HM Treasury announced that the new Financial Services Bill has been introduced in the Parliament.

    October 21, 2020 WebPage Regulatory News
    News

    APRA Initiates Action Against a Bank for Liquidity Compliance Breach

    APRA announced that it has increased the minimum liquidity requirement of Bendigo and Adelaide Bank for failing to comply with the prudential standard on liquidity.

    October 21, 2020 WebPage Regulatory News
    News

    PRA Consults on Implementation of Certain Provisions of CRD5 and CRR2

    PRA published the consultation paper CP17/20 to propose changes to certain rules, supervisory statements, and statements of policy to implement elements of the Capital Requirements Directive (CRD5).

    October 20, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Rule to Reduce Impact of Large Bank Failures

    US Agencies adopted a final rule that applies to advanced approaches banking organizations and aims to reduce interconnectedness in the financial system as well as to reduce contagion risks associated with the failure of a global systemically important bank (G-SIB).

    October 20, 2020 WebPage Regulatory News
    News

    US Agencies Finalize Rule on Net Stable Funding Ratio Requirements

    US Agencies (FDIC, FED, and OCC) adopted a final rule that implements the net stable funding ratio (NSFR) for certain large banking organizations.

    October 20, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6004