Maria Chiara Iannino

We study how temporary regulatory asymmetries affect the risk composition of credit supply in integrated banking markets. We exploit the 2013 announcement of Norway's countercyclical capital buffer (CCyB) and the phased introduction of reciprocity. This created a period during which foreign banks faced lower effective capital requirements than domestic lenders while competing in a common lending market. Using syndicated loan data and exploiting variation across domestic (Sweden and Norway) and foreign (rest of world) banks lending to the same borrower, we identify lender-specific credit supply responses. We find that foreign banks contract lending less than domestic banks following the CCyB announcement. This differential response is concentrated in unsecured lending, while we find no significant effect for secured lending. Our findings suggest that temporary regulatory asymmetries affect not only the volume of credit supplied but, importantly, also its composition. Our results identify a difference in how lenders adjust across loan types, consistent with a capital-cost channel.

The relative importance of banks for the financial system differs widely in Europe and the U.S., where Europe has historically been more bank-based than the US How does the different role of the banking systems translate into the resilience of bank business models, and of the financial system overall? In aggregate, European banks are more exposed to systemic risk relative to U.S. banks despite the fact that their book-based tier-1 core capital is comparable. However, there is wide heterogeneity across European banks, rendering the transatlantic comparison more delicate. Also, the authors find differences in social responsibility scoring between the two systems. ESG scores tend to be higher for European banks, particularly on the social and environmental components. On the other side, US banks score higher on governance items. Effectively, at the start of the pandemic in March 2020 the largest European banks were more highly levered relative to their US peers, and, consequently lagging behind in terms of market capitalization. The emerging picture for the lower quintiles in the cross-section of European banks is more favorable in terms of resilience, both within Europe and across the Atlantic.

We provide transatlantic evidence about the relation between social responsibility and resiliency in the banking industry. We analyse various measures of resiliency, an exposure measure (SRISK) and a contribution measure (Delta CoVaR) to systemic risk, as well as measures of systematic risk (beta) and insolvency risk (z-score). Social responsibility is measured by Thomson Reuters’ ESG-scores and its pillars, both according to the older Asset 4 and the present TR ESG Refinitiv classification. We find that the social aggregate score significantly enhances resiliency in all dimensions and in both classifications. On the level of subcategories, we identify significant common resiliency enhancing factor proxies for long-term orientation, such as product responsibility and workforce training, while short-term objectives proxied by shareholder orientation tend to relate to lower levels of resiliency. Looking deeper into the components of each ESG pillar, we also discover significant transatlantic differences mainly related to the different organization of labour markets as well as the board structure

We study the relationship between opacity and external funding decisions when different types of sukuk and conventional financial instruments are available. For this purpose, we construct an opacity index for 107 Malaysian firms issuing sukuk and conventional financial instruments during 2005-2017. We apply a mixed-level multinomial logistic model for our analysis. We find that as opacity levels increase, the probability of firms issuing zero-coupon sukuk is the greatest followed by conventional bonds and profit-loss sharing sukuk, and equity. Our results suggest that issuing zero-coupon sukuk requires more supervision, which has important implications for policy-makers and investors.

Purpose: This paper aims to analyze systemic risk in and the effect of capital regulation on the European insurance sector. In particular, the evolution of an exposure measure (SRISK) and a contribution measure (Delta CoVaR) are analyzed from 1985 to 2016. Design/methodology/approach: With the help of multivariate regressions, the main drivers of systemic risk are identified. Findings: The paper finds an increasing degree of interconnectedness between banks and insurance that correlates with systemic risk exposure. Interconnectedness peaks during periods of crisis but has a long-term influence also during normal times. Moreover, the paper finds that the insurance sector was greatly affected by spillovers from the process of capital regulation in banking. While European insurance companies initially at the start of the Basel process of capital regulation were well capitalized according to the SRISK measure, they started to become capital deficient after the implementation of the model-based approach in banking with increasing speed thereafter. Practical implications: These findings are highly relevant for the ongoing global process of capital regulation in the insurance sector and potential reforms of Solvency II. Systemic risk is a leading threat to the stability of the global financial system and keeping it under control is a main challenge for policymakers and supervisors. Originality/value: This paper provides novel tools for supervisors to monitor risk exposures in the insurance sector while taking into account systemic feedback from the financial system and the banking sector in particular. These tools also allow an evidence-based policy evaluation of regulatory measures such as Solvency II.

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.