Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital?
75 Pages Posted: 3 Dec 2020 Last revised: 2 Jun 2022
Date Written: November 15, 2020
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: Suggested Citation