Following the financial crisis in 2008/2009 increasing focus has been placed on prudential regulation of the financial sector, in particular the regulation of systemic risk, as systemic risk is considered one of the main reasons for the contagion of the financial crisis. In Denmark, the ‘SIFI agreement’ was passed by the Danish government, Venstre, Dansk Folkeparti, Liberal Alliance and Det Konservative Folkeparti in October 2013. This agreement dictates the regulation of the Danish SIFI institutions. In spite of the approval of the agreement, not much research has been made to assess the effects of the agreement on the Danish economy.
For that reason, the purpose of this thesis is to estimate the costs as well as discuss possible benefits of the SIFI agreement. By doing so, the thesis contributes to the clarification of the impact of financial regulation in Denmark and to the discussion of regulation of systemic risk. The primary focus of the thesis is on the increased capital requirements. The cost of the agreement is assumed to be a rise in the lending rates of the Danish financial institutions, which will increase the spread between the lending rates and CIBOR. Thus, the effect of the agreement is estimated as a response in GDP to a shock in the spread. This is estimated with a Vector Error Correction Model, which is estimated with Johansen’s ML procedure. The variables included in the model are GDP, lending, CIBOR and the spread. They are found to be non-stationary with 1 cointegration relation.
We find that the agreement will have a significant negative impact on the Danish economy in 5 quarters following a shock to the spread. However, these costs are assumed to be offset by the benefit of a more stable financial sector, including a reduction in the probability of future financial crises.
We conclude that the SIFI agreement is an improvement of the regulation of systemic risk and serve as a stabilization of the Danish financial sector.