Evaluating the Effectiveness of the Basel III G-SIB Capital Buffer Regulation: Experience from the 12 Years of a Quasi-Natural Experiment

The objective of this work is to study banks’ response to the Basel III capital regulation for global systemically important banks (G-SIBs). The buffer is revised annually. We cannot apply conventional event studies and treatment effect evaluation methodology, so we modify it to account for the multiperiod treatment and the ongoing changes in the composition of the pilot (treated) and control groups. We reveal an asymmetric reaction by G-SIBs to changes in the capital buffer. Banks tend to reduce their capital ratios and expand lending when the applicable capital buffer is officially decreased. On the contrary, banks do not increase their capital ratios and do not contract lending as expected by the regulator after the applicable capital buffer is raised. The capital cushion accumulated earlier allows banks to withstand such a rise in the prudential capital buffer. Moreover, a change in regulation stimulates more risk-taking by global banks. When tightened, it is accompanied by an increase in own funds, while it is not accompanied by such an increase when it is eased. Thus, we recommend that the list of G-SIBs and the applicable capital surcharges be revised less often to avoid such unintended responses to regulation.