Is taxpayers’ money better protected now? An assessment of banking regulatory reforms ten years after the global financial crisis

Jacopo Carmassi, Renzo Corrias and Laura Parisi

Macroprudential Bulletin, 2019, vol. 7

Abstract: This study analyses whether the ability of the euro area banking system to withstand potential shocks while minimising taxpayers’ costs has changed in the ten years since the financial crisis as a consequence of the impact of post-crisis reforms on bank capital and loss-absorbing capacity. The results show that the average probability of default of banks decreased from 3.5% in 2007 to 1.1% in 2017, less than a third of its pre-crisis value. In addition, under conservative assumptions on the scope of liabilities affected by the bail-in tool, banks’ loss-absorbing capacity has increased from 7.2% to 12.0% of total assets owing to the introduction of larger capital buffers and the new resolution framework, which enhances banks’ loss-absorbing capacity via the bail-in tool. Finally, the potential intervention of the Single Resolution Fund has further increased the loss-absorbing capacity of the system to 16.9% of total assets. Considering all these three factors, the ability of the banking system to absorb losses while minimising costs to taxpayers has increased more than 3-fold over the last ten years. When considering a broader scope for the bail-in tool, the system’s loss-absorbing capacity has increased to 55.5% of total assets, which corresponds to an overall 12-fold increase in its ability to absorb losses while minimising taxpayers’ costs. JEL Classification: G01, G21, G28

Keywords: Basel; Capital requirements; financial crisis; loss-absorbing capacity; post-crisis reforms; resolution framework (search for similar items in EconPapers)
Date: 2019-03
Note: 2973356
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