The impact of regulatory reforms for systemically important institutions, defined as “other” (O-SII)

This study examines the effects of the announcement of a prudential rule introducing the framework for other systemically important institutions (O-SII) in euro area countries. Following the announcement of the framework, there has been some slowdown in balance sheet expansion for O-SIIs relative to other banks. O-SII banks have altered their balance sheet structure, consistent with the incentive given by the O-SII buffer to reduce complexity and interconnectedness. This has been accompanied by somewhat weaker pricing power of O-SII banks, which along with higher capital requirements seem not to have led to higher risk-taking by O-SII banks. No discernible change in risk-taking strategies along with the reduction in the funding cost advantage may have contributed to a decline in profitability of O-SIIs. Overall, the introduction of the structural, non-cyclical higher capital buffers for the key nodes of the euro area banking sector seems to have helped strengthen the resilience of these banks, and, by extension, of the financial system.