The Dodd-Frank Act and Basel III: Market-based risk implications for global systemically important banks (G-SIBs)

Abstract

We examine the impact of the Dodd-Frank Act (DFA) and Basel III on market risk-taking behavior of global banks. Specifically, we measure the change in risk of global systemically important banks (G-SIBs) from the pre- global financial crisis (GFC) period to the post-European debt crisis period. Our results show a significant increase in each type of risk (total, market, and idiosyncratic) for G –SIBs from the pre-GFC period to the post-GFC period. While the risk of G-SIBs on average declined from the post-GFC period to the post-European debt crisis period, the risk level of G-SIBs on average, contrary to our expectations, is significantly higher during the post-European debt crisis period relative to the pre-GFC period. In addition, European global banks contributed significantly to the shift in risk from the pre-GFC period to the post- GFC period, as well as from the pre-GFC period to the post-European debt crisis period.