Spurious Regulation: Who Believes in 'No More Bailouts'?

One of main consequences of the Global Financial Crisis is stricter banking regulation. In fact, the black and white of the regulators' output misleads people to believe that there will be no more bailouts in the future. But history teaches us that this statement should not be taken too seriously. Therefore we may speak of 'spurious regulation'. To judge upon the degree to which implicit guarantees are pre-supposed by the credit and capital markets we investigate empirically whether there is a link between the creditworthiness of a country and the prospects of an investment in a bank's equity. Specifically, we check whether there is a significant impact of sovereign CDS spreads on stock returns using panel econometrics within a CAPM-type context. The findings are model-dependent: Using SUR we find eight cases, whereas using DCC we get only four. Hence, there might be some work to do for the regulators. Hence, using only SUR can be misleading.