Max Headroom: Discretionary Capital Buffers and Bank Risk
40 Pages Posted: 18 Jun 2020
Date Written: May 26, 2020
This paper examines the association between discretionary capital buffers, capital requirements, and risk for European banks. The discretionary buffers are banks' own buffers, or headroom: the difference between reported and required capital. I exploit capital requirements data that banks started to disclose since the release of a 2015 European Banking Authority opinion. Results using detailed SREP and Pillar 2 data of the largest 99 European banks over 2013-2019 show that less headroom is associated with increased bank risk. An additional examination reveals a positive association between headroom and stress test results for banks subjected to the Single Supervisory Mechanism, a result that runs against supervisory requirements.
Keywords: Banking, European Banks, Pillar 2 requirements, SREP
JEL Classification: E58, G21, G32, M41
Suggested Citation: Suggested Citation