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Journal of Financial and Quantitative Analysis Vol. 59 No. 2 2024

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

Reint Gropp1,2; Thomas Mosk3,2,4; Steven Ongena2,5; Ines Simac2,6; Carlo Wix2,7

1 Halle Institute for Economic Research · 2 University of Zurich · 3 Queen Mary University of London · 4 London School of Economics and Political Science · 5 Swiss Finance Institute · 6 KU Leuven · 7 Federal Reserve Board of Governors

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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.

DOI
10.1017/s002210902300025x
Volume
59
Issue
2
Pages
830-862
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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