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Do Capital Requirements Make Banks Safer? Evidence from a Quasinatural Experiment

Bostandzic, Denefa; Irresberger, Felix; Juelsrud, Ragnar E.; Weiss, Gregor N.F.

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Authors

Denefa Bostandzic

Ragnar E. Juelsrud

Gregor N.F. Weiss



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

Files

Accepted Journal Article (1.2 Mb)
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Publisher Licence URL
http://creativecommons.org/licenses/by/4.0/

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





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