Bank Regulation, Bail-in, Capital and Valuation under Uncertainty

Abstract

This thesis investigates the effectiveness of bank regulation reforms after the global financial crisis in enhancing market discipline and improving the transparency and stability of global banking systems. This objective is augmented by the implications of the 2023 banking turmoil which renewed debates on the effectiveness and credibility of the regulatory framework established after the crisis. The empirical work focuses on three dimensions of the impact of regulatory change: the EU Bank Recovery and Resolution Directive (BRRD), capital adequacy requirements, and the divergence of bank valuations across regions. The adoption of multiple methodologies underpins the findings: (i) fixed effects models, (ii) ordered probit models, (iii) difference in differences approaches. The chapters provide new evidence on the extent to which post-crisis reforms achieved their intended aims.
The first empirical chapter provides evidence on the impact of the bail-in mechanism of the EU BRRD on banks’ deposit ratings and more specifically the difference between deposit rating and debt rating levels. The analysis reveals that banks’ deposit ratings become elevated compared to banks’ credit ratings after the implementation of the bail in tool. Moreover, the effect of the resolution tool is revealed to be consistent across countries, while banks with the highest credit ratings have experienced larger differences between deposit and debt ratings compared to low-rated banks. The second empirical chapter analyses the reasons behind banks’ decisions to hold higher capital levels than mandated by the current regulatory requirements. The results show that excess capital is associated with CDS prices (credit risk) and stock returns (market risk) while the macro-economic conditions seem to not play a significant role. The third empirical chapter explores the role of economic uncertainty as a driver for a puzzling divergence in bank valuations across US, UK, and European banks. Uncertainty contributes to declines in bank valuations, having a stronger impact for US and UK. Moreover, using Brexit as an uncertainty shock supports the robustness of the results.
This thesis highlights some drawbacks with the current banking regulation. In identifying several policy implications, insights are revealed on the necessity of ongoing scrutiny and potential improvements. Overall, these findings make a significant contribution to the academic literature and to the ongoing policy debate around the resilience, transparency, and stability of the global banking system, while also being of interest to market participants.

Date of Award	2026
Original language	English
Supervisor	Owain Ap Gwilym (Supervisor) & Rasha Alsakka (Supervisor)