Sebastian C. Moenninghoff, WHU Steven Ongena, University of Zurich, SFI, Bangor University & CEPR Axel Wieandt, WHU

Transcription

1 THE PERENNIAL CHALLENGE TO COUNTER TOO-BIG-TO-FAIL IN BANKING: EMPIRICAL EVIDENCE FROM THE NEW INTERNATIONAL REGULATION DEALING WITH GLOBAL SYSTEMICALLY IMPORTANT BANKS Forthcoming, Journal of Banking and Finance Sebastian C. Moenninghoff, WHU Steven Ongena, University of Zurich, SFI, Bangor University & CEPR Axel Wieandt, WHU

2 The research question that drives us all... How to design regulation to reduce the costs and risks of Too-Big-to-Fail (TBTF)?

3 What we do (in this paper) Provide evidence on how the new international regulation on Global Systemically Important Banks (G-SIBs) impacts the market value of large banks Analyze the stock price reactions for the 300 largest banks from 52 countries across 12 relevant regulatory announcement and designation events

4 What we find The new regulation negatively affects the value of the newly regulated banks But the official designation of banks as G-SIB itself has a partly offsetting positive impact Likely due to a TBTF perception by investors Demonstrates the inherently paradoxical nature of the new regulation

5 «Paradoxial nature» is reflected in ambivalent market participants` statements. Josef Ackermann, CEO Deutsche Bank Despite the additional regulatory burden associated with G-SIB status, glad that Deutsche Bank would likely be on the list of G-SIBs as this would allow for benefits in the refinancing and depository business (Handelsblatt, June 27, 2011) The bank s G-SIB status would reflect the comparative advantages [ ] of the Bank of China versus our domestic peers (Financial Times, November 4, 2011) The opportunity outweighs the challenge (People s Daily Online, November 6, 2011)

6 LITERATURE REVIEW en bref

7 Official government announcements or the establishment of deposit insurance schemes strengthen TBTF US Comptroller of the Currency s announcement of a TBTF policy (after the bailout of large US banks in the 1980s) leads to positive shareholder wealth effects for large money center banks in O Hara & Shaw (JF 1990) Insured deposit financing shielded US bank holdings from market discipline in early 1990s as reflected in long-term credit rating actions in Billett, Garfinkel & O Neal (JFE 1998) Introduction of a deposit insurance in Russia increased banks risk taking in Chernykh & Cole (JBF 2011) Japanese deposit insurance reform strengthens TBTF in Imai (JBF 2006)

8 IM Rescue measures can contribute to the emergence of TBTF Federal Reserve Bank s coordination of the rescue of Long Term Capital Management (LTCM): impact on bank stocks in Kabir & Hassan (JBF 2005) subordinated debt yield spreads in Balasubramnian & Cyree (JBF 2011): especially large banks, see also Sironi (JMCB 2003) for Europe

9 IM Implicit government guarantees Seemingly exist, findings based on: long-term bank stock returns in Ghandi & Lustig (JF 2015): esp. large banks credit ratings (gives funding advantage) in Ueda & Weder di Mauro (JBF 2013) But not based on: uninsured CDs in Ellis & Flannery (JME 1992) Reflected in balance sheet structures in Nier & Baumann (JFI 2006) Increases risk taking by banks in Dam & Koetter (RFS 2012)

10 Banks` reacting To obtain TBTF banks merge, as reflected in increasing returns for bonds of midsize banks in Penas & Unal (JFE 2004) significant bond yield spread tightening for midsize banks in Deng, Elyasiani & Mao (JBF 2007) bondholders of banks conducting domestic mergers benefit in Ongena & Penas (JFS 2009) competitive conduct by rivals in Gropp, Hakenes & Schnabel (RFS 2011) May undercut ability of regulator to limit TBTF? Maybe not: in Flannery & Sorescu (JF 1996) and in Schafer, Schnabel & Weder di Mauro (RoF 2015)

11 G-SIB REGULATION

12 Time line : G20 establishes Financial Stability Board (FSB) in order to develop guidelines for additional regulation and oversight of G-SIBs 2009:09: G20 tasks the FSB to develop concrete measures by 2012:10, w/ the Basel Committee on Banking Supervision (BCBS) Supervision: more supervisory powers, an improved set of standards and methods, and stricter assessment regimes, as well as unambiguous mandates, independence, and appropriate resources Regulation G-SIBs hold additional capital of % Common Equity Tier 1, depending on the individual institution s systemic relevance as measured by an indicator-based approach, in order to increase the loss-absorbency of G- SIBs Resolution strengthening national resolution regimes, cross-border cooperation, and resolution planning, and the enhanced resolvability of G-SIBs

13 Appendix A

14 Costs and benefits Net wealth effect of any new regulation ultimately depends on the resulting equilibrium The additional regulatory measures for G-SIBs are widely considered to involve costs for the affected institutions Capital surcharges imply higher average funding costs as bank equity is perceived to be more costly than debt from the banks perspective Tax deductibility, information asymmetry Additional supervisory requirements The establishment of resolution regimes is also assumed to result in significant administrative, legal, and operational costs Credible resolvability would lower implicit government support, which in turn would increase funding costs for G-SIBs Value of designation as G-SIB and an explicit government guarantee

15 WHAT WE DO

16 300 largest publicly listed banks Datastream -- asset size as of the end of financial institutions subcategory 265 commercial banks, 34 investment banks, 1 bancassurance 17 countries (5 continents)

17 Table 2

18 Table 3

19 Standard event study methodology R mt = national market index

20 Discussion 1. Stock market closures and timing of news News occurring later on a business day in Europe or the US (e.g., afternoon GMT) affects Asian stocks only on the next calendar day because the local stock exchanges would already be closed Adjust the non-weekend event returns for time zones using the local stock exchange closing times as provided by MSCI and event-specific estimates about the time the information was released 2. Use of (broad) local market indices as in Campbell, Cowan, and Salotti (JBF 2010) Non-parametric tests Large individual banks may impact local index This effect seems limited for our sample 3. Estimation window -150 to Event window: 1 day Precise news time stamp Crisis generates lots of noise

21 Robustness (we want to mention immediately) 1. Calculate returns from the respective calendar days instead of time zone-adjusted event returns 2. Include the MSCI World as a global market index 3. Use a pre-crisis fixed estimation window that consists of the first 150 days in 2008 instead of a rolling estimation window preceding the event dates 4. Employ a five day (+2/-2) event window instead of a one day event window

22 WHAT WE FIND

23 Stockprices Figure 1 Figure 2

24 Table 4

25 Table 4

26 Cross-sectional exercises the value of obtaining G-SIB status is lower for G-SIBs with a higher government ownership stake we do not observe a clear relationship between home country rating and value of G-SIB designation the degree of systemic relevance as expressed by the required level of capital surcharge appears to have a dampening effect on the returns on designation

27 Conclusion We observe negative absolute as well relative CARs for G- SIBs compared to Non-G-SIBs and Other Banks upon announcements related to the new regulatory measures This confirms the hypothesis that the new regulation for G-SIBs involves costs for the affected banks. However, the official designation of particular banks as G-SIBs. which leads to positive aggregate absolute and relative CARs for G-SIBs across all three designation events Suggests that official designation as a G-SIB creates value for the affected banks shareholders. The level of ownership of a bank by domestic government determines the value of G-SIB designation, and so does the systemic relevance

28 Policy To the extent that the observed future costs from the new regulation represent a reduction in implicit government guarantees, our results confirm the effectiveness of the announced reform proposals to limit TBTF Revealing the identities of G-SIBs eliminated ambiguity about the presence of government guarantees, and thereby may have run counter to the regulators intent to contain the effects of TBTF Highlights the need for a conscious decision about the level of supervisory transparency versus constructive ambiguity