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Banks’ regulatory risk tolerance

Author

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  • Ponte Marques, Aurea
  • Juselius, Mikael
  • Tarashev, Nikola

Abstract

We employ 68 quarters of data – including from non-public supervisory sources – to study how 17 US and 17 euro-area banks balance the risk of breaching regulatory requirements against the cost of maintaining and speedily restoring “management” buffers. We find that steady-state management buffer targets systematically declined and regulatory risk tolerance (RRT) rose following the Great Financial Crisis, especially at banks experiencing a stronger increase in capital requirements. As a sign that RRT is a conscious choice, banks facing more volatile management buffer shocks set higher management buffer targets. High-RRT banks tend to respond to a depletion of their management buffers by cutting lending, whereas low-RRT banks reduce the riskiness but not the volume of their assets — thus highlighting real-economy effects of capital management strategies. JEL Classification: G21, G28, E51, G31

Suggested Citation

  • Ponte Marques, Aurea & Juselius, Mikael & Tarashev, Nikola, 2025. "Banks’ regulatory risk tolerance," Working Paper Series 3161, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253161
    Note: 3594456
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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
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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