The Market Impact of Systemic Risk Capital Surcharges
37 Pages Posted: 20 Apr 2020
Date Written: April 20, 2020
This paper tests whether an increase or decrease of the capital surcharge for being a global systemically important bank (G-SIB) envisaged by regulators has an impact on the CDS prices of these banks. We find evidence that the CDS spreads of a G-SIB bank increase (decrease) after the announcement of a higher (lower) capital surcharge. However, this effect is temporary, as the mean CDS spreads revert to pre-announcement level, dropping sharply after the initial rise. Our analysis contributes to the debate on whether being designated as a G-SIB bank necessarily leads to implicit "too-big-to-fail" subsidies. The findings imply that the investors immediately update their beliefs on the systemic risk of the bank after the bucket reallocation announcement and temporarily demand more hedging against systemic risk.
Keywords: Too-big-to-fail, CDS spreads, systemically important banks, G-SIBs, G-SIB capital surcharges
JEL Classification: G21, G28
Suggested Citation: Suggested Citation