Do the Basel III capital reforms reduce the implicit subsidy of systemically important banks? Australian evidence

This study examines whether systemically important banks realise an implicit subsidy when raising wholesale debt funding and evaluates the effectiveness of the Basel III capital reforms in reducing the subsidy. Our estimations suggest that, before the reforms, systemically important banks realise a subsidy of around 27–32 basis points when they raise senior unsecured borrowings and that, after the reforms are implemented, the subsidy is reduced by approximately one-half. We find evidence that the default protection provided by a stronger capital base substitutes for the protection provided by implicit government guarantees in lifting investor confidence in a systemically important bank.