Did the Basel Process of Capital Regulation Enhance the Resiliency of European Banks?

50 Pages Posted: 28 Sep 2018 Last revised: 2 Oct 2018

See all articles by Thomas Gehrig

Thomas Gehrig

University of Vienna - Faculty of Business, Economics, and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Vienna Graduate School of Finance (VGSF); Systemic Risk Centre - LSE

Maria Chiara Iannino

University of St Andrews

Multiple version iconThere are 3 versions of this paper

Date Written: September 27, 2018

Abstract

This paper analyses the evolution of the safety and soundness of the European banking sector during the various stages of the Basel process of capital regulation. In the first part we document the evolution of various measures of systemic risk as the Basel process unfolds. Most strikingly, we find that the exposure to systemic risk as measured by SRISK has been steeply rising for the highest quintile, moderately rising for the second quintile and remaining roughly stationary for the remaining three quintiles of listed European banks. This observation suggests that the Basel process has succeeded in containing systemic risk for the majority of European banks but not for the largest and most risky institutions. In the second part we analyze the drivers of systemic risk. We find compelling evidence that the increase in exposure to systemic risk (SRISK) is intimately tied to the implementation of internal models for determining credit risk as well as market risk. Based on this evidence, the sub-prime crisis found especially the largest and more systemic banks ill-prepared and lacking resiliency. This condition has even aggravated during the European sovereign crisis. Banking Union has not restored aggregate resiliency to pre-crises levels. Finally, low interest rates considerably a ect the contribution to systemic risk for the safer banks.

Keywords: bank capital, systemic risk, internal risk based models, contagion, resilience, regulation

JEL Classification: B26, E58, G21, G28, H12, N24

Suggested Citation

Gehrig, Thomas and Iannino, Maria Chiara, Did the Basel Process of Capital Regulation Enhance the Resiliency of European Banks? (September 27, 2018). Bank of Finland Research Discussion Paper No. 16/2018, Available at SSRN: https://ssrn.com/abstract=3256636

Thomas Gehrig (Contact Author)

University of Vienna - Faculty of Business, Economics, and Statistics ( email )

Vienna, A-1210
Austria

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom
London

Maria Chiara Iannino

University of St Andrews ( email )

School of Economics and Finance
Castlecliffe
St Andrews, KY16 9AL
United Kingdom

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