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

Author

Listed:
  • Reint Gropp

    (Halle Institute for Economic Research)

  • Thomas C. Mosk

    (University of Zurich, Research Center SAFE)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

  • Carlo Wix

    (Board of Governors of the Federal Reserve System)

  • Ines Simac

    (KU Leuven)

Abstract

We study how higher capital requirements introduced at the supranational level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that treated banks exploit discretion in the calculation of regulatory capital to inflate their capital ratios without a commensurate increase in their book equity and without a reduction in bank risk. Regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.

Suggested Citation

  • Reint Gropp & Thomas C. Mosk & Steven Ongena & Carlo Wix & Ines Simac, 2020. "Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital?," Swiss Finance Institute Research Paper Series 20-112, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp20112
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    References listed on IDEAS

    as
    1. Reint Gropp & Thomas Mosk & Steven Ongena & Carlo Wix, 2019. "Banks Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment," Review of Financial Studies, Society for Financial Studies, vol. 32(1), pages 266-299.
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    More about this item

    Keywords

    Bank capital requirements; regulatory forbearance;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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