Do the Basel III Capital Reforms Reduce the Implicit Subsidy of Systemically Important Banks? Australian Evidence

44 Pages Posted: 20 Jan 2018 Last revised: 25 Apr 2019

See all articles by James R. Cummings

James R. Cummings

Macquarie University, Faculty of Business and Economics; Centre for International Finance and Regulation (CIFR)

Yilian Guo

Macquarie University, Faculty of Business and Economics

Date Written: April 24, 2019

Abstract

This study examines whether systemically important banks realise an implicit subsidy when raising wholesale debt funding and evaluates the effectiveness of the Basel III capital reforms in reducing the subsidy. Our estimations suggest that, before the reforms, systemically important banks realise a subsidy of around 26-30 basis points when they raise senior unsecured borrowings and that, after the reforms are implemented, the subsidy is reduced by approximately one-half. We find evidence that the default protection provided by a stronger capital base substitutes for the protection provided by implicit government guarantees in lifting investor confidence in a systemically important bank.

Keywords: Commercial banks, Bank regulation, Too-big-to-fail, Bank funding costs

JEL Classification: G21, G28

Suggested Citation

Cummings, James R. and Guo, Yilian, Do the Basel III Capital Reforms Reduce the Implicit Subsidy of Systemically Important Banks? Australian Evidence (April 24, 2019). CIFR Paper No. 131/2016; 31st Australasian Finance and Banking Conference 2018; Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=2731106 or http://dx.doi.org/10.2139/ssrn.2731106

James R. Cummings

Macquarie University, Faculty of Business and Economics ( email )

Australia

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Yilian Guo (Contact Author)

Macquarie University, Faculty of Business and Economics ( email )

Australia

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