Are Large Banks Less Risky in the Basel III Period?

Abstract

Basel III has significantly increased the capital requirements for large banks after the Global Financial Crisis (GFC) in 2008 to 2009. And regulators claim that large banks are safer as they are well capitalized in terms of capital adequacy ratios in recent years. However, some studies argue that the credit risk of large banks perceived by the market has not fallen significantly since the GFC, and regulatory changes have been one contributing factor. To contribute to this debate, this paper evaluates whether the credit risk of large banks perceived by the market has decreased from the pre-crisis period to the period after the GFC by investigating the eight U.S. global systemically important banks (GSIBs). By analysing the drivers of the stock market valuation of these large banks, the paper finds that although U.S. GSIBs perform much worse than other sectors, they are less risky as perceived by the market in the Basel III period than other periods because these banks have increased their equity as a fraction of total assets significantly.