How Do European Banks Cope with Macroprudential Capital Requirements?

Abstract

This paper studies the effect of macroprudential requirements on capital ratios for a sample of euro area banks. We first document that banks’ capital ratios are typically above minimum regulatory levels. The banks in our sample differ in their degree of systemic importance and once we split the banks according to this criterion, we find that non-systemically important banks build up capital buffers to a higher extent than systemically important banks and in excess of minimum requirements. The main channel through which these banks enhance their capital ratios is the optimization of risk-weighted assets (RWA), in particular by rebalancing portfolios towards safer assets.

Keywords: European Banks; Macroprudential Requirement; Capital Ratio; Risk Weighed Assets

JEL Classification: G21; G28