ACPR: How Banks Respond to Distress: Changing Risks in the European Banking Union

The Risks, Regulation and Systemic Risks Research Initiative, known as the ACPR “Regulation and Systemic Risk” Chair, has the main missions of organizing research activities, facilitating contacts between academia and the ACPR as well as developing a center for reflection and proposals, open to the international, with regard to the management of systemic risk.

The themes for reflection articulate macroprudential issues on microprudential foundations.

The Chair uses granular portfolio data to study how European Union (EU) banking systems adjust their bond portfolios to regulatory solvency shocks.

When creditworthiness declines, banks increase their exposure to domestic bonds, especially higher yielding sovereign bonds. These effects are stronger in banking systems where variable compensation represents a larger share of senior management compensation.

Risk transfer and regulatory arbitrage best explain these results.

The finding is that bonds held by less well-capitalized banking systems trade at a discount, suggesting that the overhang of future liquidations of assets from troubled intermediaries increases current bond yields.

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Virginie Gastine Menou

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