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

Thomas Gehrig
Authors registered in the RePEc Author Service: Maria Chiara Iannino

No 11920, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 institutions. In the second part we analyse 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 (yet) brought about a significant increase in the safety and soundness of the European banking system. Finally, low interest rates affect considerably to the contribution to systemic risk across the whole spectrum of banks.

Keywords: Capital shortfall; Systemic risk; Internal risk models; Resilience; Quantile regressions (search for similar items in EconPapers)
JEL-codes: B26 E58 G21 G28 H12 N24 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec, nep-eff, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Did the Basel Process of capital regulation enhance the resiliency of European banks? (2021)
Working Paper: Did the Basel process of capital regulation enhance the resiliency of European Banks? (2018)
Working Paper: Did the Basel Process of Capital Regulation Enhance the Resiliency of European Banks? (2016)
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