Basel liquidity regulation and credit risk market perception: Evidence from large European banks

Giorgia Simion, Ugo Rigoni, Elisa Cavezzali and Andrea Veller

Research in International Business and Finance, 2024, vol. 69, issue C

Abstract: This paper aims at assessing the impact of Basel Committee on Banking Supervision (BCBS) liquidity regulation announcements on bank creditors. Using an event study on Credit Default Swap (CDS) data of large European banks over the 2007–2015 period, we find evidence that creditors increase their expectations of a credit event following the regulatory events, with CDS spreads widening. Results from the regression analysis show that this effect depends on bank-specific factors. Specifically, the negative CDS market reaction weakens when banks hold higher liquidity and capital ratios. Conversely, the negative CDS market reaction strengthens when banks hold a higher bad loan ratio. Provisions against loan losses positively moderate this effect.

Keywords: Liquidity Regulation; Basel III; Event Study (search for similar items in EconPapers)
JEL-codes: G14 G21 G28 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:69:y:2024:i:c:s0275531924000205

DOI: 10.1016/j.ribaf.2024.102228

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