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Does the G-20's Regulatory Agenda for Banks Affect the Market's Perception of Bank's Risk?

38 Pages Posted: 25 Sep 2015 Last revised: 17 Mar 2017

Matias Daniel Cabrera

BBVA Research

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Maria Nieto

Banco de España

Date Written: March 15, 2017

Abstract

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

Cabrera, Matias Daniel and Dwyer, Gerald P. and Nieto, Maria, Does the G-20's Regulatory Agenda for Banks Affect the Market's Perception of Bank's Risk? (March 15, 2017). Available at SSRN: https://ssrn.com/abstract=2665033 or http://dx.doi.org/10.2139/ssrn.2665033

Matias Cabrera (Contact Author)

BBVA Research ( email )

Madrid
Spain

Gerald Dwyer

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Maria Nieto

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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