| dc.description.abstract | If recovery and resolution directives are credible, investors owning bail-in debt will have an
incentive to monitor the risk of a bank. In this thesis we have analyzed the effects of the new
EU resolution framework, with a special focus on the minimum requirement for own funds
and eligible liabilities (MREL). We have studied how the Norwegian bond market, mainly
focused on Tier 2, senior and senior non-preferred (SNP) debt, have shifted the risks within
the mentioned debt classes. The new debt class SNP is introduced as a consequence of the
MREL regulation.
We have constructed our own credit model to price the credit risk inspired by the Merton
model. The results from our model are then compared with market data collected from
Nordic Bond Pricing (NBP). We find the pricing of these debt classes to be in line with their
position in the credit hierarchy. The relative risks within our credit model are also
comparable to the market data. However, within the SNP class we observe two securities
where a call option seems to be mispriced. A SNP bond with an embedded call option traded
at levels equal to an equivalent bond without the option, with equal credit risk, are most
likely mispriced and thereby being an arbitrage opportunity. This breaks the premise that an
option has a strictly positive value. As the implementation of the SNP class is an ongoing
process, we believe the differences between credit risk from NBP data and our own
estimates will settle over time.
As the MREL regulations are not fully implemented in Norway yet, there can be new
changes concerning the volume of SNP expected to be issued by the market. The total
volume of SNP issuances can change even without regulatory changes, because the
requirement of each bank depends on how their assets are distributed. In our analysis we find
the volume and pricing of SNP debt to be positively correlated with the MREL set for banks.
A higher MREL requires more SNP debt to be issued. | en_US |
