What Drives Bank-Specific Capital Requirements? Evidence from the Ssm

Abstract

Drawing on recently disclosed information on the Pillar 2 capital requirements of banks directly supervised by the ECB, we find that bank-specific capital requirements are mostly driven by business model and profitability, credit risk, and internal governance and risk management issues. Moreover, we propose a novel measure of bank governance quality that teases out the qualitative dimension of the P2R decision. Effectively, we find a significant relationship between our proposed measure and several corporate governance proxies used in the literature.

Keywords: banking, supervision, Pillar 2, capital requirements, bank governance