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Project

The Adverse Effects of New Bank Regulation: Contingent Convertibles and Expected Provisioning.

The banking sector was a focal point during the financial crisis of 2007-2008. The experience of the Great Recession revealed the weak points of the then existing regulation. In particular, bank’s low level of capitalization prior to 2007 was blamed. First, low levels of capital and reserves contributed to the contraction of bank lending. Basel III significantly increased the minimum capital requirements at the same time allowing them to be met with Contingent Convertibles (CoCos). Additionally, the incurred loss approach of impairment loss recognition shifted towards a forward-looking expected approach. In this project I investigate the efficacy of these two new pieces of regulation. First, using a contingent claim model I examine if CoCos indeed deserve the status of capital. In particular, I study the effect of CoCos on shareholders incentives to issue additional equity and shift risk. I further test prediction of my theory by analyzing the data on CoCo issues in Europe. In the second avenue of my research, I develop a quantitative dynamic model of a bank to study the procyclicality of the expected loss policy.
Date:1 Oct 2018 →  30 Sep 2020
Keywords:new bank regulation
Disciplines:Other philosophy, ethics and religious studies not elsewhere classified, Theory and methodology of philosophy, Philosophy, Ethics, Applied economics, Economic history, Macroeconomics and monetary economics, Microeconomics, Tourism