Has Centralised Supervision Made European Banks More Resilient?

Abstract

This study evaluates the impact of the centralised supervision framework in Europe in the Single Supervisory Mechanism on banks’ balance sheets. By implementing a matching procedure coupled with a difference-in-difference approach, we test for differences in Tier 1 capital to total assets ratio between centrally supervised banks and nationally supervised banks for the years 2007-2020. Our results show that centrally supervised banks consistently have a higher ratio. An investigation of the potential drivers finds an important role of mandatory capital requirements, banks’ business model and credit risk. Moreover, this effect is driven by those banks being located in countries with less stringent regulatory and legal environments. Overall, our findings suggest that centrally supervised banks have become more resilient.

Keywords: Centralised supervision, Single Supervisory Mechanism, Bank resilience, Financial stability, European regulation