Working Paper: CEPR ID: DP15764
Authors: Reint Gropp; Thomas Mosk; Steven Ongena; Ines Simac; Carlo Wix
Abstract: We study how higher capital requirements introduced at the supranational and implemented at the national level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that affected banks inflate their levels of regulatory capital without a commensurate increase in their book equity and without a reduction in bank risk. This observed regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten. Our results suggest that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.
Keywords: capital requirements; EBA capital exercise; national forbearance
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CE banks (F36) | regulatory capital to book equity ratio (G32) |
| CE banks (F36) | inflation of regulatory capital (G28) |
| CE banks (F36) | reduction in capital deductions (G32) |
| weakly capitalized banks (G21) | stronger incentive to inflate regulatory capital (G28) |
| increase in regulatory capital ratios (G28) | no improvement in safety and soundness (G28) |
| national authorities (F53) | regulatory forbearance (G28) |
| regulatory forbearance (G28) | inflation of regulatory capital ratios (G28) |