DP15764 Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital?
|Author(s):||Reint Gropp, Thomas Mosk, Steven Ongena, Ines Simac, Carlo Wix|
|Publication Date:||February 2021|
|Date Revised:||February 2021|
|Keyword(s):||Capital requirements, EBA capital exercise, national forbearance|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=15764|
We study how higher capital requirements introduced at the supranational and implemented at the national level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that affected banks inflate their levels of regulatory capital without a commensurate increase in their book equity and without a reduction in bank risk. This observed regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten. Our results suggest that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.