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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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    Cited by:

    1. Nistor, Simona & Fărcaș, Ioana Georgiana, 2025. "Does national culture affect macroprudential policy? An international investigation of regulatory behavior on macroprudential interventions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 45(C).
    2. Bednarek, Peter & Briukhova, Olga & Ongena, Steven & Westernhagen, Natalja v., 2025. "Effects of bank capital requirements on lending by banks and non-bank financial institutions," Journal of Financial Intermediation, Elsevier, vol. 63(C).
    3. Luciana Orozco & Silvina Rubio, 2025. "Regulatory Capital Management to Exceed Thresholds," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 57(6), pages 1421-1464, September.
    4. Sylwia Klus & Artur Stefanski & Zuzanna Urbanowicz & Leszek Wanat, 2024. "Capital Adequacy Standards on the Case of Selected Banks in Poland Under Economic Uncertainty," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 517-530.
    5. Martynova, Natalya & Perotti, Enrico & Suarez, Javier, 2022. "Capital forbearance in the bank recovery and resolution game," Journal of Financial Economics, Elsevier, vol. 146(3), pages 884-904.
    6. Nicholas Fritsch & Jan-Peter Siedlarek, 2022. "How Do Banks Respond to Capital Regulation? — The Impact of the Basel III Reforms in the United States," Working Papers 22-11, Federal Reserve Bank of Cleveland.
    7. Jermann, Urban & Xiang, Haotian, 2025. "Rules versus discretion in capital regulation," Journal of Financial Economics, Elsevier, vol. 169(C).

    More about this item

    Keywords

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    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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