Do Regulatory Capital Requirements Matter for Bond Yields?

41 Pages Posted: 4 Jun 2018 Last revised: 24 Jun 2018

See all articles by Catharina Claussen

Catharina Claussen

University of Muenster

Johannes Kriebel

University of Muenster

Andreas Pfingsten

University of Münster - Finance Center Münster

Date Written: June 4, 2018

Abstract

This paper assesses the effect of banking regulation on bond yields. The costs for banks associated with capital requirements for holding bonds may lead to the demand for a higher compensatory yield. As government debt in particular is treated preferentially, capital costs may determine part of the spread between corporate and government bonds. We introduce a new measure for approximating the part of the spread that is induced by regulatory capital costs. Using German bond price data, we find that the costs associated with capital requirements explain a substantial fraction of the credit spread. Our findings contribute to the debate on whether to abolish the preferential treatment of government bonds in banking regulation and are of relevance for policymakers, banks and investors.

Keywords: Sovereign Debt, Sovereign Risk, Banking Regulation, Credit Spreads, Cost of Capital, Basel III

JEL Classification: G28, G21, G12

Suggested Citation

Claussen, Catharina and Kriebel, Johannes and Pfingsten, Andreas, Do Regulatory Capital Requirements Matter for Bond Yields? (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3190043 or http://dx.doi.org/10.2139/ssrn.3190043

Catharina Claussen (Contact Author)

University of Muenster ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

Johannes Kriebel

University of Muenster ( email )

Universitätsstraße 14-16
Münster, D-48143
Germany

Andreas Pfingsten

University of Münster - Finance Center Münster ( email )

Universitätsstr. 14-16
Muenster, D-48143
Germany

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