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
JEL(s): G21
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.