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Do capital requirements make banks safer? Evidence from a quasi-natural experiment

Bostandzic, Denefa and Irresberger, Felix and Juelsrud, Ragnar E. and Weiss, Gregor N.F. 'Do capital requirements make banks safer? Evidence from a quasi-natural experiment.', Journal of financial and quantitative analysis. .

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.

Item Type:Article
Keywords:Capital requirements, regulation, banks, risk, Basel III.
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives 4.0.
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Status:Peer-reviewed
Publisher Web site:https://doi.org/10.1017/S0022109021000612
Publisher statement:This article will be published in a revised form in Journal of financial and quantitative analysis at http://journals.cambridge.org/action/displayJournal?jid=JFQ. This version is published under a Creative Commons CC-BY-NC-ND. No commercial re-distribution or re-use allowed. Derivative works cannot be distributed. © copyright holder.
Date accepted:04 January 2021
Date deposited:19 January 2021
Date of first online publication:No date available
Date first made open access:19 January 2021

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