Journal of Financial and Quantitative Analysis Vol. 57 No. 5 2022
Do Capital Requirements Make Banks Safer? Evidence From a Quasinatural Experiment
Abstract
We use the EBA capital exercise of 2011 as a quasinatural experiment to investigate how capital requirements affect various measures of bank solvency risk. We show that, while regulatory measures of solvency improve, nonregulatory measures indicate a deterioration in bank solvency in response to higher capital requirements. The decline in bank solvency is driven by a permanent reduction in banks’ market value of equity. This finding is consistent with a reduction in bank profitability, rather than a repricing of bank equity due to a reduction of implicit and explicit too-big-too-fail guarantees. We then discuss alternative policies to improve bank solvency.
- DOI
- 10.1017/s0022109021000612
- Volume
- 57
- Issue
- 5
- Pages
- 1805-1833
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref