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Supranational Rules, National Discretion: Increasing Versus Inflating Regulatory Bank Capital?

Published online by Cambridge University Press:  10 March 2023

Reint Gropp ,
Thomas Mosk ,
Steven Ongena ,
Ines Simac  and
Carlo Wix Open the ORCID record for Carlo Wix [Opens in a new window]
Reint Gropp
Affiliation:
Halle Institute for Economic Research, University of Magdeburg, and CEPR [email protected]
Thomas Mosk
Affiliation:
Queen Mary University London, School of Economics and Finance [email protected]
Steven Ongena
Affiliation:
University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR [email protected]
Ines Simac
Affiliation:
KU Leuven [email protected]
Carlo Wix*
Affiliation:
Federal Reserve Board
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

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We study how banks use “regulatory adjustments” to inflate their regulatory capital ratios and whether this depends on forbearance on the part of national authorities. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that banks substantially inflated their levels of regulatory capital via a reduction in regulatory adjustments (without a commensurate increase in book equity and without a reduction in bank risk). We document substantial heterogeneity in regulatory capital inflation across countries, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 830 - 862
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

For helpful comments and suggestions, we thank an anonymous referee, Tobias Berg, Diana Bonfim, Filippo De Marco (discussant), Mara Faccio (the editor), Artashes Karapetyan (discussant), Huyen Nguyen, Felix Noth, Lena Tonzer, Missaka Warusawitharana, and the conference and seminar participants at the 2021 FIRS conference, the 2021 Bristol Workshop on Banking and Financial Intermediation, the 2019 SFI-Capco Institute Banking & Finance Forum, the European Banking Authority (EBA), Goethe University Frankfurt, and the Federal Reserve Board. The views expressed in this article solely reflect those of the authors and not necessarily those of the Federal Reserve Board, the Federal Reserve System as a whole, or of anyone associated with the Federal Reserve System. Ongena acknowledges financial support from ERC ADG 2016–GA 740272 lending.

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