The article looks into the reasons underlying the outspread of the full-scale mechanism of banking regulation over U. S. investment banks. We analyze the effect of the Basel III standards on stress-resilience of investment banks and examine the role of U. S. investment banks in ensuring financial stability. Based on regression analysis we found that minimum capital adequacy standards of Basel III do not have negative effect on ROE of the U. S. investment banks that are G-SIB category-designate; however, additional capital requirements (Higher Loss Absorbency (HLA) surcharge) that depend on G-SIB's systemic significance according to their bucket as per Financial Stability Board classification do have significant and negative effect on ROE in the post crisis period. Besides, leverage requirements that also depend on G-SIB's systemic significance have a statistically significant effect on ROE.
The global financial crisis of 2007–09, followed by sweeping overhaul of international banking regulation, urged financial regulators to apply a tailored supervisory regime to global systemically important banks (G-SIBs). This approach was caused by exacerbation of the G-SIBs' systemic risks and their transmission during macro level instability. The size of G-SIBs, the extent of their market power, and the heterogeneity of their operating models resulted in their dual role in systemic stress: being a source of systemic risks for the macro level, G-SIBs are at the same time transmitters of crisis developments to the micro level, hence increasing their own exposure to risks. Under these circumstances, the objectives of the post-crisis recovery required a revision of regulatory priorities by shifting them from G-SIBs' profitability to G-SIBs' stress resilience through the application to them of more stringent capital adequacy standards and liquidity requirements, which ultimately contributed to G-SIBs' insusceptibility to external shocks. At the same time, the G-SIBs' role in exacerbation of systemic stress remains uncertain due to the unresolved issues of the G-SIBs' systemic importance. Accordingly, the crisis and liquidity dilemmas remain unresolved. Given the high level of G-SIBs interconnectedness in the international financial area, their dysfunction can provoke a domino effect of insolvency and bankruptcies in the international banking sector. Based on 2011–21 statistics for all G-SIBs included in the annual lists of the Financial Stability Board (FSB), we found certain decline in G-SIBs' systemic risks, which is attributable to further strengthening of their market discipline. This proves that international regulatory policy is on the right track. We also found that the stress resilience of G-SIBs, a product of the application of Basel III capital surcharge buffers and the total loss-absorbing capacity (TLAC) standard, significantly contributed to financial stability at a level sufficient not only for the integrity of G-SIBs' performance during the COVID-19 pandemic, but also for minimization of the risk of collapse of the banking systems that prevented the transformation of the related shocks and instability into an economy-wide crisis. Nevertheless, the post-crisis regulatory reform failed to contain the systemic importance of G-SIBs, mostly due to the lack of supervisory tools and techniques in reduction of the negative effects of the G-SIBs' international interconnectedness.
