Harmonized Regulations and Systemic Risk: Evidence from Global-Systemically Important Banks

Abstract

In 2011 the Financial Stability Board designated 29 of the world’s largest banks as global-systemically important banks (G-SIB), and imposed additional restrictions on their activities. After implementation of the G-SIB regulatory regime, we find that relative to other large banks, G-SIBs’ individual default risks increased, the co-movements among G-SIBs’ stock returns, CDS spreads and implied option volatilities increased, and several accounting performance measures converged. Consequently, an adverse shock to one G-SIB is more likely to be associated with an adverse shock to other G-SIBs, which weakens the ability of the banking system to withstand the shock.

Keywords: Systemic risk, Regulation, Banks, Co-movement

JEL Classification: G21, G28