How Do Banks Adjust to Stricter Supervision?

43 Pages Posted: 20 Sep 2015 Last revised: 5 Jan 2017

See all articles by Maximilian Eber

Maximilian Eber

Harvard University - Department of Economics

Camelia Minoiu

Federal Reserve Board

Date Written: November 1, 2016

Abstract

We exploit a discontinuity in the assignment of banks to the European Central Bank's new supervisory framework and a major stress test to identify the effects of increased regulatory scrutiny on bank balance sheets. We find that banks adjust to stricter supervision by reducing leverage, and most of the adjustment stems from shrinking assets rather than from raising equity. We estimate a 7 percent reduction in leverage, two thirds of which are due to asset shrinkage. Securities are adjusted much more strongly than the loan book. On the liability side, banks mainly reduce their reliance on wholesale funding. Using data on the issuance of large corporate loans, we find that very weak banks also reduce the supply of credit. The evidence emphasizes banks' reluctance to adjust capital when target leverage changes and suggests that macroprudential considerations matter for stress-testing in practice.

Keywords: bank capital, deleveraging, stress-testing, macroprudential policies, Euro area

JEL Classification: C21, E51, G21, G28

Suggested Citation

Eber, Maximilian and Minoiu, Camelia, How Do Banks Adjust to Stricter Supervision? (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2662502 or http://dx.doi.org/10.2139/ssrn.2662502

Maximilian Eber (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Camelia Minoiu

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
245
Abstract Views
1,278
rank
125,857
PlumX Metrics