Regulatory updates from RR Donnelley December 2015
Presentation - Thesis
1. The Senior Unsecured Debt of European Banks
How Unsecured after the Implementation of the Bank Recovery and
Resolution Directive?
Valentino Di Rienzo
Supervised by: Prof. Andrea Cesare Resti
Bocconi University
7th April 2016
2. 1 Abstract
2 The Legal Framework of the BRRD - Research Question
3 Methodology
4 Results
5 Conclusions
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3. Abstract
The Banking Recovery and Resolution Directive (the ”BRRD”) is a new regulatory framework
for credit and financial institution instability at European level. Unlike previous legal schemes,
the new regulation shifts the burden of recovery from taxpayers’ funds to institution stakeholders.
From the depositor to the senior bondholder, from the subordinate bondholder to the shareholder,
bank investors will be asked to contribute to recapitalize the institution on the brink of insolvency.
We examined how senior unsecured debt of a pool of German banks and of a pool of Italian banks
reacted to the implementation of the Directive on specific dates when unexpected news regarding
the BRDD application became public. Given the event clustering that is typical in an event
study that wants to assess the impact of a specific regulation, we implemented the Kolari and
Pynn¨onen (2010) correction for within bank security correlation. Our analysis shows that following
news releases, investors actually readjusted their preferences towards capital instruments that the
European regulator excluded from recapitalization. Once controlling for cross correlation, the
effect is generally not significant anymore
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4. The Bank Recovery and Resolution Directive
It stands for the European solution to the ”Too Big to Fail” paradigm. The
institution’s investor will contribute to the recapitalisation and not the tax-
payers (Art. 10, Art, 31, Art, 36 et al.). The Directive passed on 15th
May
2014
The Directive introduces the Bail-in tool: The resolution authority can in-
ternalise the institution’s losses through a conversion to equity or reduce the
principal amount of claims. The tool is enforceable from 1st
January 2016
Scope of the Bail-in tool The European regulator designed the bail-in tool
to be applied to all institution’s liabilities. Specific exceptions comprehend:
1 Deposits up to EUR 100,000 (Covered Deposits)
2 Secured liabilities including e.g. Covered Bonds
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5. The Bail-in Hierarchy Scheme
Research Question
How did the senior unsecured debt of a pool of German and Italian banks react to
the introduction of the new legislation?
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6. 1 Abstract
2 The Legal Framework of the BRRD - Research Question
3 Methodology
4 Results
5 Conclusions
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7. The Sample
We focused on evaluating the impact over the German and Italian bank system
through the biggest national banks in terms of total assets1
Through the BloombergTM
termi-
nal, we retrieved the interested
debt securities belonging to those
issuers according to the following
criteria:
1 Collateral Type (Senior
Unsecured or Covered)
2 Amount outstanding
3 Date of issue
4 Maturity
1
The Italian sample accounts for nearly 45% of market share in domestic customer loans; the
German sample accounts for nearly 48% of market share in domestic customer loans
Valentino Di Rienzo The Senior Unsecured Debt of European Banks 7 / 28
8. The Event Study
The Event Study Approach
We implemented an Adjusted Market Model that would describe the bond
behaviour in the estimation window
YLDiτ = αi + βi iTraxxbnk,τ + γi CDScountry,τ
The Event Date is set to τ = 0
Estimation Window (L2) is set
−60 ≤ τ ≤ 2 days
Event Window is set to
−2 ≤ τ ≤ 2 days
YLDiτ is the mid yield to maturity of
bond i at time τ
CDScountry,τ corresponds to the
National (Ger or Ita) Credit Default
Swap
Modified version of iTraxx Europe
Senior Financial Index at time τ
SCARt−test =
N(L1 − 5)
L1 − 3
1
2
SCARi (τ1, τ2) (1)
SCAR2
t−test ∼ N(0, 1)
2
The Prediction Error formula is in the appendix
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9. The Regulatory Event Study - Problems and Solutions
(1/2)
1 - Exact Event Dates
Regulatory change largerly expected from the market (G20 Pittsburgh
Summit 2009)
Exploiting unexpected peculiarities of national implementation acts
Germany
1 10th May 2015, First public
consultation of Draft
Implementation Decree
Italy
1 29th July 2015, First public
consultation of Draft
Implementation Decree
2 24th August 2015, Bloomberg
News on Italian Extended
Preference
3 23nd November 2015,
Resolution of four Italian banks
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10. The Regulatory Event Study - Problems and Solutions
(2/2)
2 - Event Clustering
Abnormal returns inside the event window are not independent. They share
all the same event, so the SCARt−test reveals to be less powerful
Exploit the Kolari and Pynn¨onen (2010) approach. It assumes q industries
for k = 1.....q where all have the same event date but the inter-industry
correlations are zero. Meanwhile within each subgroup the variances of the
standardised returns are the same
Average sample correlation
˜¯r =
1
n(n − 1)
q
k=1
nk (nk − 1) ¯rk (2)
Adjusted SCARt−test
K&Ptest =
SCARt−test
1 + (n − 1)˜¯r
(3)
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11. 1 Abstract
2 The Legal Framework of the BRRD - Research Question
3 Methodology
4 Results
5 Conclusions
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12. Control and Treatment Group
Treatment Group
Senior Unsecured bonds of picked
issuers
Germany 32 bonds
Italy 62 bonds
Control Group
Covered bonds of picked issuers
Germany 37 bonds
Italy 38 bonds
The bail-in operability allows us to select a Treatment and a Control group
that match issuers’ idiosyncrasies
Did investors preferences shift from ’bail-inable’ to ’not bail-inable’ instruments?
Valentino Di Rienzo The Senior Unsecured Debt of European Banks 12 / 28
13. Germany
Table: SCARt−test 10th
March
SCAR test Senior SCAR test Covered test diff
-9,339 -15,572 3.648***
Table: K&Ptest 10th
March
r senior r covered SCAR test Senior SCAR test Covered test diff
0.165 0.16 -3.77 -5.91 1.46
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14. Italy - 29th
July
Table: SCARt−test 29th
July
SCAR test Senior SCAR test Covered test diff
-7.75 -19.46 10.66***
Table: K&Ptest - 29th
July
r Senior r Covered SCAR test Senior SCAR test Covered test diff
0.286 0.292 -1.696 -5,742 2.85***
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15. Italy - 24th
August
Table: SCARt−test 24th
August
SCAR test Senior SCAR test Covered test diff
-17.613 -20.546 5.492***
Table: K&Ptest - 24th
August
r Senior r Covered SCAR test Senior SCAR test Covered test diff
0.258 0.272 -4,306 -6.253 1.536
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16. Italy - 23rd
November
Table: SCARt−test 23rd
November
SCAR test Senior SCAR test Covered test diff
-9.761 -11.206 2.90***
Table: K&Ptest - 23td
November
r Senior r Covered SCAR test Senior SCAR test Covered test diff
0.260 0.243 -2.377 -3.587 0,81
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17. 1 Abstract
2 The Legal Framework of the BRRD - Research Question
3 Methodology
4 Results
5 Conclusions
Valentino Di Rienzo The Senior Unsecured Debt of European Banks 17 / 28
18. Conclusions and Further Research
Bail-in related events seem to have had influence investors’ preferences.
SCARt−tests show for both Germany and Italy a shift from ’bail-inable’ to
’not bail-inable’
The effect seems to disappear once controlling for within group correlation
Further studies should focus on retrieve bond liquidity
Self-financing portfolio strategies for single issuers
Bail-in effect on Probability od Default (PD) and Loss Given Default (LGD)
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19. Appendix
German Senior Bond list
German Covered Bond list
Italian Senior Bond list
Italian Covered Bond list
iTraxx Europe FIN SNR components
Prediction Error
Bibliography
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24. Table: MarkitTM
iTraxx S22 S23 S24
Company Name S22 - Start Date 09/22/14 Mty Date 12/20/19 Company Name S23 - Start Date 03/20/15 Mty Date 06/20/20 Company Name S24 - Start Date 09/21/15 Mty Date 12/20/20
Aegon NV Aegon NV Aegon NV
Allianz SE Allianz SE Allianz SE
Assicurazioni Generali SpA Assicurazioni Generali SpA Assicurazioni Generali SpA
Aviva PLC Aviva PLC Aviva PLC
AXA SA AXA SA AXA SA
Banco Bilbao Vizcaya Argentaria SA Banco Bilbao Vizcaya Argentaria SA Banco Bilbao Vizcaya Argentaria SA
Banco Santander SA Banco Santander SA Banco Santander SA
Barclays Bank PLC Barclays Bank PLC Barclays Bank PLC
BNP Paribas SA BNP Paribas SA Bayerische Landesbank
Commerzbank AG Commerzbank AG BNP Paribas SA
Credit Agricole SA Cooperatieve Rabobank UA Commerzbank AG
Credit Suisse Group AG Credit Agricole SA Cooperatieve Rabobank UA
Deutsche Bank AG Credit Suisse Group AG Credit Agricole SA
Hannover Rueck SE Danske Bank A/S Credit Suisse Group AG
HSBC Bank PLC Deutsche Bank AG Danske Bank A/S
ING Bank NV Hannover Rueck SE Deutsche Bank AG
Intesa Sanpaolo SpA HSBC Bank PLC Hannover Rueck SE
Lloyds Bank PLC ING Bank NV HSBC Bank PLC
Muenchener Rueckversicherungs-Gesellschaft AG in Muenchen Intesa Sanpaolo SpA ING Bank NV
Societe Generale SA Lloyds Bank PLC Intesa Sanpaolo SpA
Standard Chartered Bank Mediobanca SpA Lloyds Bank PLC
Royal Bank of Scotland PLC/The Muenchener Rueckversicherungs-Gesellschaft AG in Muenchen Mediobanca SpA
UBS AG Societe Generale SA Muenchener Rueckversicherungs-Gesellschaft AG in Muenchen
UniCredit SpA Standard Chartered Bank Societe Generale SA
Zurich Insurance Co Ltd Svenska Handelsbanken AB Standard Chartered Bank
Swiss Reinsurance Co Ltd Swiss Reinsurance Co Ltd
Royal Bank of Scotland PLC/The Royal Bank of Scotland PLC/The
UBS AG UBS AG
UniCredit SpA UniCredit SpA
Zurich Insurance Co Ltd Zurich Insurance Co Ltd
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25. Prediction Error Forumla
PEiτ = 1 +
1
L1
+
DTraxxbnk
(CDSCountry(i,τ) − CDSCountry )2
DTraxxbnk
DCDS − (Cod(Traxxbnk, CDSCountry ))2
+
DCDSCountry
(Traxxbank(i,τ) − Traxxbnk)2
DTraxx DCDS − (Cod(Traxx, CDSCountry ))2
−
2Cod(Traxxbnk, CDSCountry )(Traxxbnk(i,τ) − Traxxbnk)(CDSCountry(i,τ) − CDSCountry )
DTraxx DCDS − (Cod(Traxx, CDSCountry ))2
DTraxxbnk
and DCDSCountry
stand for the iTraxxbnk and CDSCountry deviance in the
estimation window L1 respectively
Traxxbnk and CDSCountry stand respectively for the sample average in the estimation
window for the iTraxxbnk and the CDScountry variable
Cod(Traxxbnk, CDSCountry ) is the codeviance between the iTraxxbnk and CDSCountry
variable in the estimation window L1
Valentino Di Rienzo The Senior Unsecured Debt of European Banks 25 / 28
26. References I
CAMPBELL, J. Y., LO, A. W.-C., and MACKINLAY, A. C. (1997).
The econometrics of financial markets, volume 2.
princeton University press Princeton, NJ.
ESRB (2015).
European Systemic Risk Board Report on the Regulatory Treatment of
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FAMA, E. F., FISHER, L., JENSEN, M. C., and ROLL, R. (1969).
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KOLARI, J. W. and PYNN¨ONEN, S. (2010).
Event study testing with cross-sectional correlation of abnormal returns.
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Valentino Di Rienzo The Senior Unsecured Debt of European Banks 26 / 28
27. References II
LA FERRARA, E. and GUIDOLIN, M. (2004).
Diamonds are forever, wars are not: Is conflict bad for private firms?
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Journal of Financial Economics, 18(2):341–371.
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Event studies in economics and finance.
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Valentino Di Rienzo The Senior Unsecured Debt of European Banks 27 / 28
28. References III
PYNN¨ONEN, S. (2005).
On regression based event study.
Acta Wasaensia, 143:327–354.
SANTIAGO, F. D. L., CARLOS, P., VICTORIA, S., and JAVIER, G. (2015).
Eu loss-absorbing capacity requirement: Final mrel guidlines.
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SCHWERT, G. W. (1981).
Using financial data to measure effects of regulation.
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Valentino Di Rienzo The Senior Unsecured Debt of European Banks 28 / 28
