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

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

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: Jan 19, 2021
• 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