Unintended consequences of post-crisis banking reforms

The post 2007 - 2009 financial crisis reforms in banking were meant to increase the resilience and capitalisation of the financial system, but they might have also lead to unintended consequences. This thesis focuses on two of these reforms: the introduction of contingent convertible bonds (CoCos), and the introduction of the leverage ratio requirement. CoCos are meant to act as a bail-in mechanism for banks, but as I show in this thesis, they can also lead to internal contagion or increase banks’ risk-taking depending on their design features. The first paper is a theoretical analysis on the financial stability of a bank with CoCos that trigger at different capitalisation levels, and the second paper is an empirical analysis on the risk-taking determinants and implications for UK banks of having CoCos on their balance sheet. The introduction of the leverage ratio requirement is meant to stop excessive leverage, but it might incentivise some banks to invest more in their high risk, high margin businesses rather than in their low margin, low risk activities, leading to an overall increase in banks’ risk-taking. In this thesis, we assess in a theoretical model and numerical calibration on UK banks the risk-taking effects when a bank applies its capital requirements at a consolidated level compared to applying them at each business unit.