The G-20's Regulatory Agenda and Banks’ Risk
41 Pages Posted: 25 Sep 2015 Last revised: 17 Jun 2018
Date Written: March 15, 2017
Using a sample of international listed banks from the United States, Europe, Japan and China, our paper analyzes the effect on risk of some of the most relevant new elements of the prudential regulatory framework following the Financial Crisis of 2007-2008. Our analysis also takes into consideration governments' financial support received by banks in crisis. We use the realized volatility of banks' stock returns as a measure of the market’s perception of banks' overall risk. In general we find that regulators' approach to safety and soundness seems consistent with the ex post market perception of banks' overall risks. Regulation aimed at reducing banks' leverage is consistent with prudential regulators' overall objective of limiting banks' idiosyncratic risks. The evidence is mixed regarding regulation aimed at imposing limits on securities trading (e.g. proprietary trading). Public support of banks is consistent with preserving financial stability; however, government capitalization of individual banks enhances risk perception since the market recognizes the capital injection as a revelation of partially unknown problems penalizing the bank.
JEL Classification: G21, G28
Suggested Citation: Suggested Citation