Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital?

75 Pages Posted: 3 Dec 2020 Last revised: 2 Jun 2022

See all articles by Reint Gropp

Reint Gropp

Halle Institute for Economic Research

Thomas C. Mosk

University of Zurich, Research Center SAFE

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Carlo Wix

Board of Governors of the Federal Reserve System

Ines Simac

KU Leuven

Multiple version iconThere are 3 versions of this paper

Date Written: November 15, 2020

Abstract

We study how banks use "regulatory adjustments" to inflate their regulatory capital ratios and whether this depends on forbearance on the part of national authorities. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that banks substantially inflated their levels of regulatory capital via a reduction in regulatory adjustments - without a commensurate increase in book equity and without a reduction in bank risk. We document substantial heterogeneity in regulatory capital inflation across countries, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.

Keywords: Bank capital requirements, regulatory forbearance

JEL Classification: G21, G28

Suggested Citation

Gropp, Reint and Mosk, Thomas C. and Ongena, Steven R. G. and Wix, Carlo and Simac, Ines, Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital? (November 15, 2020). Swiss Finance Institute Research Paper No. 20-112, Available at SSRN: https://ssrn.com/abstract=3731333 or http://dx.doi.org/10.2139/ssrn.3731333

Reint Gropp

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Thomas C. Mosk (Contact Author)

University of Zurich, Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Carlo Wix

Board of Governors of the Federal Reserve System ( email )

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

Ines Simac

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

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