Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract European banks are exposed to a substantial amount of risky sovereign debt. The "missing bank capital" resulting from the zero-risk weight exemption for European banks for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border financial-crisis spillovers. Risks spill over from risky periphery sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. We consider the trade-off of benefits of sovereign debt (for banks and sovereigns) and spillover risk when applying risk-weights. More bank capital as well as positive risk-weighting for sovereign exposures mitigates spillovers.JEL classification: G01, G21, G28, G14, G15, F23

No abstract

We analyze the Volcker Rule’s announcement effects on U.S. bank holding companies. In line with the rule and the banks’ public compliance announcements, we find that those banks that are affected by the Volcker Rule already reduced their trading books relative to their total assets 2.34% more than other banks. However, the announcement of the rule did not reduce the banks’ overall risk taking. To keep their risk targets, the affected banks raised the riskiness of their asset returns. We also find some evidence that the affected banks raised their trading risk and decreased the hedging of their banking business. Data, as supplemental material, are available at https://doi.org/10.1287/mnsc.2016.2583 . This paper was accepted by Gustavo Manso, finance.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe propose a framework for testing the eects of changes in bank resolution regimes on bank behavior. By exploiting the dierential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for dierent types of banks, we are able to simulate a quasi-natural experiment using a dierence-in-dierence framework. We nd that banks that are more aected by the introduction of the OLA (1) signicantly decrease their overall risk-taking and (2) shift their business model and loan origination towards lower risk, indicating the general eectiveness of the regime change. This eect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit nancial institutions' risk-taking. Non-technical summary Bank regulators and legislators have discussed and brought into force signicant changes to bank resolution regimes in an eort to prevent future crises. However, can this really induce more prudent bank behavior? Economic theory indeed suggests that credible improvements in resolution regimes can increase overall bank discipline. When bank regulators, i.e., the authorities competent for resolution decisions, do not have access to a special bank resolution regime and appropriate resolution funds, they might incur large liquidity costs -such as temporary disruptions in lending that would add downward risks to the real economy -if they have to resolve a failed bank. Despite the long run benets of discipline, competent authorities might hence prefer bailouts or forbearance over straightforward resolution. Improvements in resolution regimes, however, that (a) legally empower the authorities to execute bank resolution faster and more eciently while preserving more liquidity, and (b) endow the authorities with sucient nancial resources to resolve banks, make resolution a more likely choice. Consequently, to the extent that an improvement in bank resolution regimes is credible and enforceable, implicit bailout guarantees might cease, and banks might change their behavior towards less risk-taking.Building on this theoretical background, we dene our hypothesis that banks aected by a tightening in resolution regimes alter their behavior towards less risk-taking and safer business models.We t...

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe propose a framework for testing the e ects of changes in bank resolution regimes on bank behavior. By exploiting the di erential relevance of recent changes in U.S. bank resolution (i.e., the introduction of the Orderly Liquidation Authority, OLA) for di erent types of banks, we are able to simulate a quasi-natural experiment using a di erence-in-di erence framework. We nd that banks that are more a ected by the introduction of the OLA (1) signi cantly decrease their overall risk-taking and (2) shift their business model and loan origination towards lower risk, indicating the general e ectiveness of the regime change. This e ect, however, does (3) not hold for the largest and most systemically important banks. Hence, the introduction of the OLA in the U.S. alone does not appear to have solved the too-big-to-fail problem and might need to be complemented with other measures to limit nancial institutions' risk-taking. Non-technical summary Bank regulators and legislators have discussed and brought into force signi cant changes to bank resolution regimes in an e ort to prevent future crises. However, can this really induce more prudent bank behavior? Economic theory indeed suggests that credible improvements in resolution regimes can increase overall bank discipline. When bank regulators, i.e., the authorities competent for resolution decisions, do not have access to a special bank resolution regime and appropriate resolution funds, they might incur large liquidity costs -such as temporary disruptions in lending that would add downward risks to the real economy -if they have to resolve a failed bank. Despite the long run bene ts of discipline, competent authorities might hence prefer bailouts or forbearance over straightforward resolution. Improvements in resolution regimes, however, that (a) legally empower the authorities to execute bank resolution faster and more e ciently while preserving more liquidity, and (b) endow the authorities with su cient nancial resources to resolve banks, make resolution a more likely choice. Consequently, to the extent that an improvement in bank resolution regimes is credible and enforceable, implicit bailout guarantees might cease, and banks might change their behavior towards less risk-taking.Building on this theoretical background, we de ne our hypothesis that banks a ected by a tightening in resolution regimes alter their behavior towards less risk-taking and safer busi...