The Effects of National Discretions on Banks

43 Pages Posted: 21 Sep 2010

See all articles by Isabel Argimón

Isabel Argimón

Banco de España

Jenifer Ruiz-Valenzuela

London School of Economics & Political Science (LSE)

Date Written: September 20, 2010

Abstract

The EU's transposition of Basel II into European law has been done through the Capital Requirements Directive (CRD). Although the Directive establishes, in general, uniform rules to set capital requirements across European countries, there are some areas where the Directive allows some heterogeneity. In particular, countries are asked to choose among different possibilities when transposing the Directive, which are called national discretions (ND). The main objective of our research is to use such observed heterogeneity to gather empirical evidence on the effects on European banks of more or less stringency and more or less risk sensitivity in capital requirements. Following the approach in Barth et al. (2004, 2006, 2008) we build index numbers for groups of national discretions and applying Altunbas et al. (2007) approach, we provide evidence on their effect on banks' risk, capital, efficiency and cost. We show that more stringency and more risk sensitivity in regulation not always result in a trade off between efficiency and solvency: the impact depends on the area of national discretion on which such characteristics apply.

Keywords: Prudential regulation, capital requirements, bank capital, risk, efficiency

JEL Classification: E61, G21, G28

Suggested Citation

Argimón, Isabel and Ruiz-Valenzuela, Jenifer, The Effects of National Discretions on Banks (September 20, 2010). Banco de Espana Working Paper No. 1029. Available at SSRN: https://ssrn.com/abstract=1679696 or http://dx.doi.org/10.2139/ssrn.1679696

Isabel Argimón (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Jenifer Ruiz-Valenzuela

London School of Economics & Political Science (LSE)

Houghton Street
London, WC2A 2AE
United Kingdom

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