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Do Buffer Requirements for European Systemically Important Banks Make Them Less Systemic

Author

Listed:
  • Carmen Broto

    (Banco de España)

  • Luis Fernández Lafuerza

    (Banco de España)

  • Mariya Melnychuk

    (Banco de España)

Abstract

With a panel data model for a sample of listed European banks, we demonstrate that capital requirements for systemically important institutions (SIIs) effectively reduce the perceived systemic risk of these institutions, which we proxy with the SRISK indicator in Brownlees and Engle (2017). We also study the impact of the adjustment mechanisms that banks use to comply with SII requirements. The results show that banks mainly respond to higher SII buffers by increasing their equity. Once we control for the options SIIs employ to fulfill these requirements and SII characteristics, we find a residual effect of having SII status.

Suggested Citation

  • Carmen Broto & Luis Fernández Lafuerza & Mariya Melnychuk, 2025. "Do Buffer Requirements for European Systemically Important Banks Make Them Less Systemic," International Journal of Central Banking, International Journal of Central Banking, vol. 21(1), pages 235-272, January.
    • Handle: RePEc:ijc:ijcjou:y:2025:q:1:a:5
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    References listed on IDEAS

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    1. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    2. Bats, Joost V. & Houben, Aerdt C.F.J., 2020. "Bank-based versus market-based financing: Implications for systemic risk," Journal of Banking & Finance, Elsevier, vol. 114(C).
    3. Yann Braouezec & Keyvan Kiani, 2021. "Target capital ratio and optimal channel(s) of adjustment: a simple model with empirical applications to European banks," Applied Economics, Taylor & Francis Journals, vol. 53(13), pages 1435-1462, March.
    4. Vogel, Ursula, 2020. "O-SII designation and deposit funding costs," Economics Letters, Elsevier, vol. 192(C).
    5. Thomas F. Coleman & Alex LaPlante & Alexey Rubtsov, 2018. "Analysis of the SRISK measure and its application to the Canadian banking and insurance industries," Annals of Finance, Springer, vol. 14(4), pages 547-570, November.
    6. Bridges, Jonathan & Gregory, David & Nielsen, Mette & Pezzini, Silvia & Radia, Amar & Spaltro, Marco, 2014. "The impact of capital requirements on bank lending," Bank of England working papers 486, Bank of England.
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    Cited by:

    1. Arnone, Massimo & Costantiello, Alberto & Leogrande, Angelo, 2025. "Analyzing Risk Exposure Determinants in European Banking: A Regulatory Perspective," MPRA Paper 123190, University Library of Munich, Germany.
    2. Carlos Pérez Montes & Jorge E. Galán & María Bru & Julio Gálvez & Alberto García & Carlos González & Samuel Hurtado & Nadia Lavín & Eduardo Pérez Asenjo & Irene Roibás, 2023. "Systemic analysis framework for the impact of economic and financial risks," Occasional Papers 2311, Banco de España.
    3. repec:osf:osfxxx:2u4jb_v1 is not listed on IDEAS

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    More about this item

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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