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Has regulatory capital made banks safer? Skin in the game vs moral hazard

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  • Dautović, Ernest

Abstract

The paper evaluates the impact of a phased-in introduction of capital requirements on equity, risk-taking, and probability of default for a sample of European systemically important banks. Contrary to the case of a one-off introduction of capital requirements, this study does not find evidence of deleveraging through asset sales. A phased-in tightening promotes adjustment to lower leverage via an increase in equity thereby improving resilience and loss absorption capacity. The higher resilience comes at the cost of a portfolio reallocation towards riskier assets. Consistently with models on agency costs and gambling for resurrection, the risk-taking is driven by large and less profitable banks. The net impact on bank probabilities of default is positive albeit statistically insignificant, suggesting that risk-taking may crowd-out solvency. JEL Classification: E51, G21, G28, O52

Suggested Citation

  • Dautović, Ernest, 2020. "Has regulatory capital made banks safer? Skin in the game vs moral hazard," Working Paper Series 2449, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20202449
    Note: 2777855
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    Cited by:

    1. Couaillier, Cyril & Reghezza, Alessio & Rodriguez d’Acri, Costanza & Scopelliti, Alessandro, 2025. "How to release capital requirements in an economic downturn? Evidence from euro area credit register," Journal of Financial Intermediation, Elsevier, vol. 63(C).
    2. Krause, Thomas & Sfrappini, Eleonora & Tonzer, Lena & Zgherea, Cristina, 2025. "How do EU banks’ funding costs respond to the CRD IV? An assessment based on the banking union directives database," Journal of Financial Stability, Elsevier, vol. 78(C).
    3. Couaillier, Cyril & Reghezza, Alessio & Rodriguez d’Acri, Costanza & Scopelliti, Alessandro, 2022. "How to release capital requirements during a pandemic? Evidence from euro area banks," Working Paper Series 2720, European Central Bank.
    4. Bruch, Jan & Seitz, Franz & Vollmer, Uwe, 2024. "Monetary and macroprudential policies with direct and indirect financing: Implications for macroeconomic stability," Weidener Diskussionspapiere 91, University of Applied Sciences Amberg-Weiden (OTH).
    5. van der Plaat, Mark & Spierdijk, Laura, 2020. "Recourse, asymmetric information, and credit risk over the business cycle," MPRA Paper 104718, University Library of Munich, Germany.
    6. Böhnke, Victoria & Ongena, Steven & Paraschiv, Florentina & Reite, Endre J., 2023. "Back to the roots of internal credit risk models: Does risk explain why banks' risk-weighted asset levels converge over time?," Journal of Banking & Finance, Elsevier, vol. 156(C).
    7. Bremus, Franziska & Ludolph, Melina, 2021. "The nexus between loan portfolio size and volatility: Does bank capital regulation matter?," Journal of Banking & Finance, Elsevier, vol. 127(C).
    8. Agovino, Massimiliano & Bartoletto, Silvana & Garofalo, Antonio, 2022. "A long-term analysis of efficiency in the Italian banking system from 1861 to 2010," Structural Change and Economic Dynamics, Elsevier, vol. 61(C), pages 227-241.
    9. Ćehajić, Aida & Košak, Marko, 2021. "Macroprudential measures and developments in bank funding costs," International Review of Financial Analysis, Elsevier, vol. 78(C).
    10. Dreusch, Dennis & Noth, Felix & Reichling, Peter, 2025. "Nothing special about an allowance for corporate equity: Evidence from Italian banks," Journal of International Money and Finance, Elsevier, vol. 150(C).
    11. Irena Pyka & Aleksandra Nocoń, 2021. "Banks’ Capital Requirements in Terms of Implementation of the Concept of Sustainable Finance," Sustainability, MDPI, vol. 13(6), pages 1-17, March.
    12. Lubberink, Martien, 2022. "Max headroom: Discretionary capital buffers and bank risk," International Review of Financial Analysis, Elsevier, vol. 84(C).

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    Keywords

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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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