Max Headroom: Discretionary Capital Buffers and Bank Risk

40 Pages Posted: 18 Jun 2020

See all articles by Martien Jan Peter Lubberink

Martien Jan Peter Lubberink

Victoria University of Wellington - School of Accounting and Commercial Law

Date Written: May 26, 2020

Abstract

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

Lubberink, Martien Jan Peter, Max Headroom: Discretionary Capital Buffers and Bank Risk (May 26, 2020). Available at SSRN: https://ssrn.com/abstract=3610562 or http://dx.doi.org/10.2139/ssrn.3610562

Martien Jan Peter Lubberink (Contact Author)

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

New Zealand
+64 4 463 5968 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
53
Abstract Views
584
rank
419,240
PlumX Metrics