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

53 Pages Posted: 25 Nov 2020

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; Centre for Economic Policy Research (CEPR)

Ines Simac

KU Leuven

Carlo Wix

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 15, 2020

Abstract

We study how higher capital requirements introduced at the supranational level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that treated banks exploit discretion in the calculation of regulatory capital to inflate their capital ratios without a commensurate increase in their book equity and without a reduction in bank risk. Regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.

Suggested Citation

Gropp, Reint and Mosk, Thomas C. and Ongena, Steven R. G. and Simac, Ines and Wix, Carlo, Supranational Rules, National Discretion: Increasing Versus Inflating Regulatory Bank Capital? (November 15, 2020). SAFE Working Paper No. 296, Available at SSRN: https://ssrn.com/abstract=3736781 or http://dx.doi.org/10.2139/ssrn.3736781

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ines Simac

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Carlo Wix

Board of Governors of the Federal Reserve System ( email )

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

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