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Do Capital Requirements Make Banks Safer? Evidence From a Quasinatural Experiment

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  • Bostandzic, Denefa
  • Irresberger, Felix
  • Juelsrud, Ragnar E.
  • Weiß, Gregor

Abstract

We use the EBA capital exercise of 2011 as a quasinatural experiment to investigate how capital requirements affect various measures of bank solvency risk. We show that, while regulatory measures of solvency improve, nonregulatory measures indicate a deterioration in bank solvency in response to higher capital requirements. The decline in bank solvency is driven by a permanent reduction in banks’ market value of equity. This finding is consistent with a reduction in bank profitability, rather than a repricing of bank equity due to a reduction of implicit and explicit too-big-too-fail guarantees. We then discuss alternative policies to improve bank solvency.

Suggested Citation

  • Bostandzic, Denefa & Irresberger, Felix & Juelsrud, Ragnar E. & Weiß, Gregor, 2022. "Do Capital Requirements Make Banks Safer? Evidence From a Quasinatural Experiment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(5), pages 1805-1833, August.
    • Handle: RePEc:cup:jfinqa:v:57:y:2022:i:5:p:1805-1833_5
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