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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Impact of Capital and Liquidity Regulation on Banks' long-term Funding Costs - Empirical Evidence and Policy Implications |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 95 |
| Date | 2014 |
| Abstract Text | Executive Summary Problem statement Financial institutions’ unrestrained leverage as well as deficient liquidity cushions has triggered extensive negative shocks in the financial system during the world-wide financial crisis which started in 2007. To overcome such deficiencies, regulators around the world have developed and implemented regulatory frameworks which will enhance banks’ equity requirements. Furthermore, more solid and long-term funding of banks operations is required under the new regulatory frameworks. To this day, the scientific literature primarily has analyzed the effect on banks’ long-term funding costs resulting from the new supervisory regulation on a qualitative basis. This thesis assesses in a quantitative manner the relationship between the higher capital requirements and the long-term funding costs by using empirical evidence of the CDS spreads of European banks. It will answer the question if there is a statistically significant negative effect between an increase in the capitalization and the CDS spreads of European banks. If the CDS spreads decrease, then banks could profit from lower funding costs. This effect could probably be offset by the Net Stable Funding Ratio (NSFR) which requires more solid and long-term funding sources. Therefore, this thesis tests the following two hypotheses: • an increase in capital ratios leads to lower CDS spreads of European banks • a higher NSFR leads to higher CDS spreads of European banks Out of the estimation results, this thesis will discuss whether higher capital and liquidity requirements are strategic complementarities or substitutes, leading to contrary or auxiliary policy implications. Finally, a recommendation will be made whether higher capital requirements in combination with higher liquidity requirements are needed to realize net social benefits. |
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