Bank capital requirements and systemic risk: Evidence from a quasi-natural experiment

34 Pages Posted: 7 Oct 2017 Last revised: 28 Dec 2018

See all articles by Denefa Bostandzic

Denefa Bostandzic

Heinrich Heine University Dusseldorf

Felix Irresberger

University of Leeds - Leeds University Business School (LUBS)

Ragnar Juelsrud

BI Norwegian Business School - Department of Economics

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: December 14, 2018

Abstract

Using the EBA capital exercise of 2011 as a quasi-natural experiment, we investigate how capital requirements affect various measures of systemic risk. We show that systemic risk exposure increases in response to higher capital requirements. This increase is driven by a decline in the banks’ market value of equity, an increase in the systematic risk of bank returns, and an increase in the Value-at-Risk of banks. We then discuss the underlying mechanisms behind our findings. Our results are most consistent with banks actively rebalancing their portfolios which in turn results in more correlated bank assets, as well as investors stigmatizing banks that are subject to higher capital requirements. Finally, we discuss the implications of our results for policies aimed at reducing systemic risk.

Keywords: Capital requirements, systemic risk, Basel III

JEL Classification: G01, G21, G28

Suggested Citation

Bostandzic, Denefa and Irresberger, Felix and Juelsrud, Ragnar and Weiss, Gregor N. F., Bank capital requirements and systemic risk: Evidence from a quasi-natural experiment (December 14, 2018). Leeds University Business School Working Paper No. 18-02. Available at SSRN: https://ssrn.com/abstract=3048305 or http://dx.doi.org/10.2139/ssrn.3048305

Denefa Bostandzic

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, NRW 40225
Germany

Felix Irresberger

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

Ragnar Juelsrud (Contact Author)

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

HOME PAGE: http://ragnar.juelsrud.no

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

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