In the dissertation, we analyzed the potential impact of selected regulatory responses to the GFC in two geographical regions. First, we estimated the effect of changes in capital adequacy regulations on the Hungarian banking sector. Specifically, we aimed to show whether the pre-GFC introduction of a countercyclical capital buffer as per the Basel III rules could have helped decelerate FX lending growth in Hungary. Since the relationship between regulatory capital and lending growth is ambiguous, we estimated two VAR models. The unconstrained version aimed to provide the upper bound for the effect of macroprudential tightening on the real economy, as it does not require the increase in capital requirement to be a supply shock. At the same time, the SVAR model serves as the lower bound since sign restrictions on lending and alternative funding growth ensure that the increase in capital requirement is considered a supply shock. Based on our analysis, we made the following conclusions: Thesis 1. Keeping the capital adequacy ratio requirement at its 2005 Q1 level, would have resulted in a moderate decline in cumulative real lending growth. Both our Vector Autoregression (VAR) and Structural Vector Autoregression (SVAR) estimations suggest that an increase of 13 basis points in aggregate capital adequacy ratio, i.e. keeping the ratio at its 2005 Q1 level, is associated with a decline of 0-14 percentage points in cumulative real lending growth compared to actual growth after 10 quarters. Given that actual cumulative growth was 100 per cent between 2004Q1 and 2007Q3, our estimation results thus indicate only a modest slowdown to 86 per cent. Thesis 2. The modest impact of a change in capital requirement on lending suggests that regulatory authorities could not have avoided the upswing in FX lending by requiring countercyclical capital buffers even if such a tool had been available and they had reacted quickly to accelerating credit growth. Our estimation results suggest that authorities could only have slowed the increase in lending temporarily, it would have regained its momentum after 4 quarters. The results support the postcrisis conventional wisdom about the inadequacy of pre-crisis regulatory frameworks. Therefore, it points toward providing the authorities responsible for financial stability with more power and flexibility so that they can identify systemic risks and respond to them quickly and more efficiently. Thesis 3. A more pronounced tightening might have eliminated FX lending, but at the expense of real GDP growth. Macroeconomic fundamentals were fragile when FX lending started, with the significant fiscal vulnerabilities requiring the central bank to keep the policy rate at elevated levels. Due to the high differential between HUF and FX interest rates and households’ low risk awareness regarding exchange-rate volatility, FX lending became very popular and contributed significantly to real GDP growth in the pre-crisis period. The bottom line is that an unsustainable fiscal policy led to a trade-off between economic growth and the build-up of new vulnerabilities in the form of FX lending. Thesis 4. Both introducing positive risk weights and limits on sovereign exposures could reduce the impact of a potential crisis due to higher ability of banks for loss absorption, more diversified portfolio, better risk transparency and reduced systemic risk. In our dissertation, we analyzed the two widely discussed basic options to address this regulatory gap: applying non-zero risk weights to sovereign exposures, and putting limits on exposures to sovereigns, akin to those in place for other exposures. Although this paper analyses each option in isolation, the two complement one another as they target different facets of risk. Positive risk weights address counterparty credit risk, whereas large exposure limits address concentration risk. Both policy options would, according to our analysis, lead to improved bank risk management and render banks more resilient. They would equip them to better absorb losses: positive risk weights would require higher capital buffers and exposure limits would lead to greater diversification. Positive risk weights would also improve risk transparency and correct distorted incentives for investing in sovereign bonds. At the systemic level, leverage would decrease and losses in the event of default would be more spread out. On the downside, both regulatory proposals would lower bank profitability in the short run. In the longer run, positive risk-weights could permanently reduce bank profits by increasing their funding costs, while exposure limits would lead to a more diversified portfolio and lower funding costs. Moreover, they could also lower the potential for twin crises – sovereign and banking – due to weaker ties between the balance sheets of these two sectors. At the same time, they could aggravate future economic crises by limiting the funding options for sovereigns. Thesis 5. Since banks’ ability to accommodate temporary large swings in financing needs of the sovereigns would be constrained by either of the two policy options, this could call for an improved fiscal framework at the European level. A credible backstop should be in place to signal to investors that sovereigns have access to sufficient funds in case of need and ward off any short-term market fluctuations. The effect of the new regulations on sovereigns depends on the modality and timing of the introduction. A gradual increase in the risk weights and a relatively long phasing-in period could alleviate the pressure on sovereign debt markets and help avoid strained fiscal adjustments, thereby lowering the macroeconomic costs of the new regulations. Nevertheless, based on recent experience with banks’ adjustments in response to regulatory changes, the possibility of the new regulation being frontloaded is high. The extent of frontloading would depend on the price elasticity of sovereign debt and the share of sovereign exposure that the banks are able to value at book value. Thesis 6. As banks would lower their demand for sovereign debt, sovereigns would need to find new investors that could prove difficult for some countries. The benefits in terms of increased resilience in the banking sector would come at a cost for some sovereigns. Sovereign bond holdings would become more costly in terms of capital if positive risk weights were applied or the exposures were capped by a hard limit. In both cases, banks would try to deal with excess sovereign bonds on their balance sheets by injecting fresh capital or reducing their portfolio of sovereign bonds. An increased supply of sovereign paper, or a lack of demand for new issues, would raise funding costs for the sovereign and consequently for the whole economy. Furthermore, both policy options would lower liquidity in the sovereign debt markets, as they add to the cost and hinder the ability of banks to provide market-making services. Exposure limits in particular would have significant repercussions on markets in the short run, as banks traditionally have large exposures to domestic sovereigns that they would have to shed. Other market participants would need to absorb this additional supply. Sovereigns would need to re-arrange their financing sources, which could prove challenging. As the demand of local investors for sovereign debt tends to be more reliable and stable, sovereigns would have to adjust to the new market, potentially having to deal with more volatility, currency risk or new requirements regarding sustainability.