Denefa Bostandzic
Do Capital Requirements Make Banks Safer? Evidence from a Quasinatural Experiment
Bostandzic, Denefa; Irresberger, Felix; Juelsrud, Ragnar E.; Weiss, Gregor N.F.
Authors
Abstract
We use the EBA capital exercise of 2011 as a quasi-natural experiment to investigate how capital requirements affect various measures of bank solvency risk. We show that, while regulatory measures of solvency improve, non-regulatory 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.
Citation
Bostandzic, D., Irresberger, F., Juelsrud, R. E., & Weiss, G. N. (2022). Do Capital Requirements Make Banks Safer? Evidence from a Quasinatural Experiment. Journal of Financial and Quantitative Analysis, 57(5), 1805-1833. https://doi.org/10.1017/s0022109021000612
Journal Article Type | Article |
---|---|
Acceptance Date | Jan 4, 2021 |
Online Publication Date | Sep 10, 2021 |
Publication Date | 2022-08 |
Deposit Date | Jan 13, 2021 |
Publicly Available Date | Mar 28, 2024 |
Journal | Journal of Financial and Quantitative Analysis |
Print ISSN | 0022-1090 |
Electronic ISSN | 1756-6916 |
Publisher | Cambridge University Press |
Peer Reviewed | Peer Reviewed |
Volume | 57 |
Issue | 5 |
Pages | 1805-1833 |
DOI | https://doi.org/10.1017/s0022109021000612 |
Keywords | Capital requirements, regulation, banks, risk, Basel III. |
Public URL | https://durham-repository.worktribe.com/output/1253490 |
Related Public URLs | https://dx.doi.org/10.2139/ssrn.3048305 |
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Copyright Statement
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Published Journal Article (FirstView)
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Publisher Licence URL
http://creativecommons.org/licenses/by/4.0/
Copyright Statement
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