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Distributional Income Effects of Banking Regulation in Europe

Lars Brausewetter, Melina Ludolph, Lena Tonzer
IWH Discussion Papers, No. 24, 2023
Abstract
We study the impact of stricter and more harmonized banking regulation along the income distribution using household survey data for 25 EU countries. Exploiting country-level heterogeneity in the implementation of European Banking Union directives allows us to control for confounders and identify effects. Our results show that these regulatory reforms aimed at increasing financial system resilience affected households heterogeneously. More stringent regulation reduces income growth for low-income households due to employment exits. Yet it tends to increase growth rates at the top of the distribution both for employee and self-employed income.
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CoCo Bonds, Bank Stability, and Earnings Opacity

Melina Ludolph
IWH Discussion Papers, No. 1, 2022
Abstract

This paper examines the effect of CoCo bonds that qualify as additional tier 1 capital on bank stability and reporting. The results reveal a significant reduction in the distance to insolvency following the hybrid bond issuance due to increased earnings volatility. Banks report less stable net income due to more volatile loss provisions, which increases earnings opacity rather than reflects changes in asset quality. The findings are consistent with the premise that persistent uncertainty and misconceptions among investors about bail-in likelihoods limit their monitoring engagement, which results in banks becoming less transparent.

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