Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-15T20:24:20.477Z Has data issue: false hasContentIssue false
  • English
  • Français

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

Published online by Cambridge University Press:  10 September 2021

Denefa Bostandzic ,
Felix Irresberger Open the ORCID record for Felix Irresberger [Opens in a new window] ,
Ragnar E. Juelsrud  and
Gregor Weiß
Denefa Bostandzic
Affiliation:
Universität Witten/Herdeckedenefa.bostandzic@uni-wh.de
Felix Irresberger
Affiliation:
Durham University Business Schoolfelix.irresberger@durham.ac.uk
Ragnar E. Juelsrud*
Affiliation:
Norges Bank
Gregor Weiß
Affiliation:
Universität Leipzigweiss@wifa.uni-leipzig.de
*
ragnar@juelsrud.no (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 5 , August 2022 , pp. 1805 - 1833
Creative Commons
Creative Common License - CCCreative Common License - BY
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), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee and Paul Malatesta (the editor) for their insightful and constructive feedback. We thank Takuji Arai, Martin Holm, Daniel Kinn, Daisuke Nagakura, Teruo Nakatsuma, Plamen Nenov, and Ella Getz Wold, and seminar participants at BI Norwegian Business School and Keio University for useful comments, discussions, and suggestions. Weiß gratefully acknowledges financial support from the Fritz Thyssen Stiftung as well as the Commerzbank Stiftung. We have no potential conflicts of interest. This article should not be reported as representing the views of Norges Bank. The views expressed are those of the authors and do not necessarily reflect those of Norges Bank.

References

Acharya, V. V.; Berger, A. N.; and Roman, R. A.. “Lending Implications of U.S. Bank Stress Tests: Costs or Benefits?” Journal of Financial Intermediation, 34 (2018), 58–90.CrossRefGoogle Scholar
Acharya, V. V.; Engle, R.; and Pierret, D.. “Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights.” Journal of Monetary Economics, 65 (2014), 36–53.CrossRefGoogle Scholar
Acharya, V. V.; Engle, R. F.; and Richardson, M.. “Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks.” American Economic Review: Papers and Proceedings, 102 (2012), 59–64.CrossRefGoogle Scholar
Acharya, V. V.; Pedersen, L. H.; Philippon, T.; and Richardson, M.. “Measuring Systemic Risk.” Review of Financial Studies, 30 (2017), 2–47.CrossRefGoogle Scholar
Adrian, T., and Brunnermeier, M. K.. “CoVaR.” American Economic Review, 106 (2016), 1705–1741.CrossRefGoogle Scholar
Aiyar, S.; Calomiris, C. W.; Hooley, J.; Korniyenko, Y.; and Wieladek, T.. “The International Transmission of Bank Capital Requirements: Evidence From the UK.” Journal of Financial Economics, 113 (2014), 368–382.CrossRefGoogle Scholar
Aiyar, S.; Calomiris, C. W.; and Wieladek, T.. “Does Macro-Prudential Regulation Leak? Evidence From a U.K. Policy Experiment.” Journal of Money, Credit and Banking, 46 (2014), 181–214.CrossRefGoogle Scholar
Aiyar, S.; Calomiris, C. W.; and Wieladek, T.. “How Does Credit Supply Respond to Monetary Policy and Bank Minimum Capital Requirements?” European Economic Review, 82 (2016), 142–165.CrossRefGoogle Scholar
Bahaj, S., and Malherbe, F.. “The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending.” The Journal of Finance, 75 (2020), 3013–3053.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure, and the Low-Risk Anomaly.” American Economics Review: Papers & Proceedings, 105 (2015), 315–320.CrossRefGoogle Scholar
Bayazitova, D., and Shivdasani, A.. “Assessing TARP.” Review of Financial Studies, 25 (2012), 377–407.CrossRefGoogle Scholar
Benoit, S.; Colletaz, G.; Hurlin, C.; and Pérignon, C.. “A Theoretical and Empirical Comparison of Systemic Risk Measures.” Working Paper, Université Paris Dauphine (2014).Google Scholar
Berger, A. N.; Roman, R. A.; and Sedunov, J.. “Did TARP Reduce or Increase Systemic Risk? The Effects of Government Aid on Financial System Stability.” Journal of Financial Intermediation, 43 (2020), 100810.CrossRefGoogle Scholar
Berrospide, J. M., and Edge, R. M.. “The Effects of Bank Capital Buffers on Bank Lending and Firm Activity: What Can We Learn From Five Years of Stress-Test Results?” Finance and Economics Discussion Series (2019).CrossRefGoogle Scholar
Bhattacharya, S. “Imperfect Information, Dividend Policy, and ‘The Bird in the Hand’ Fallacy.” Bell Journal of Economics, 10 (1979), 259–270.CrossRefGoogle Scholar
Bogdanova, B.; Fender, I.; and Takáts, E.. “The ABCs of Bank PBRs.” BIS Quarterly Review, 81 (2018).Google Scholar
Bostandzic, D., and Weiss, G. N.. “Why do Some Banks Contribute More to Global Systemic Risk?” Journal of Financial Intermediation, 35 (2018), 17–40.CrossRefGoogle Scholar
Bouwman, C. H.; Hu, S.; and Johnson, S. A.. “Differential Bank Behaviors Around the Dodd–Frank Act Size Thresholds.” Journal of Financial Intermediation, 34 (2018), 47–57.CrossRefGoogle Scholar
Brownlees, C. T., and Engle, R.. “SRISK: A Conditional Capital Shortfall Measure of Systemic Risk.” Review of Financial Studies, 30 (2017), 48–79.CrossRefGoogle Scholar
Célérier, C.; Kick, T.; and Ongena, S.. “Taxing Bank Leverage: The Effects on Bank Capital Structure, Credit Supply and Risk-Taking.” Working Paper, University of Toronto (2018).Google Scholar
Chousakos, K. T., and Gorton, G. B.. “Bank Health Post-Crisis.” NBER Working Paper No. 23167 (2017).CrossRefGoogle Scholar
Cortés, K. R.; Demyanyk, Y.; Li, L.; Loutskina, E.; and Strahan, P. E.. “Stress Tests and Small Business Lending.” Journal of Financial Economics, 136 (2020), 260–279.CrossRefGoogle Scholar
D’Acunto, F., and Rossi, A.. “Regressive Mortgage Credit Redistribution in the Post-Crisis Era.” Review of Financial Studies, 35 (2022), 482–525.CrossRefGoogle Scholar
Degryse, H.; Karapetyan, A.; and Karmakar, S.. “To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization.” Journal of Financial Economics, 142 (2021), 239–260.CrossRefGoogle Scholar
Engle, R. “Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models.” Journal of Business and Economic Statistics, 20 (2002), 339–350.CrossRefGoogle Scholar
Engle, R. “Systemic Risk 10 Years Later.” Annual Review of Financial Economics, 10 (2018), 125–152.CrossRefGoogle Scholar
Fraisse, H.; Lé, M.; and Thesmar, D.. “The Real Effects of Bank Capital Requirements.” Management Science, 66 (2019), 5–23.CrossRefGoogle Scholar
Gao, Y.; Liao, S.; and Wang, X.. “Capital Markets Assessment of the Economic Impact of the Dodd Frank Act on Systemically Important Financial Firms.” Journal of Banking & Finance, 86 (2018), 204–223.CrossRefGoogle Scholar
Gehrig, T., and Iannino, M. C.. “Capital Regulation and Systemic Risk in the Insurance Sector.” Journal of Financial Economic Policy, 10 (2018), 237–263.CrossRefGoogle Scholar
Greenwood, R.; Hanson, S. G.; Stein, J. C.; and Sunderam, A.. “Strengthening and Streamlining Bank Capital Regulation.” Brookings Papers on Economic Activity (2017).CrossRefGoogle Scholar
Gropp, R.; Hakenes, H.; and Schnabel, I.. “Competition, Risk-Shifting, and Public Bail-Out Policies.” Review of Financial Studies, 24 (2011), 2084–2120.CrossRefGoogle Scholar
Gropp, R.; Mosk, T.; Ongena, S.; and Wix, C.. “Banks Response to Higher Capital Requirements: Evidence From a Quasi-Natural Experiment.” Review of Financial Studies, 32 (2019), 266–299.CrossRefGoogle Scholar
Haldane, A. G., and Madouros, V.. “The Dog and the Frisbee.” Revista de Economía Institucional, 14 (2012), 13–56.Google Scholar
Hou, K.; Karolyi, G. A.; and Kho, B.-C.. “What Factors Drive Global Stock Returns?” Review of Financial Studies, 24 (2011), 2527–2574.CrossRefGoogle Scholar
Ince, O., and Porter, R.. “Individual Equity Return Data From Thomson Datastream: Handle With Care!” Journal of Financial Research, 29 (2006), 463–479.CrossRefGoogle Scholar
Jiménez, G.; Ongena, S.; Peydró, J.-L.; and Saurina, J.. “Macroprudential Policy, Countercyclical Bank Capital Buffers, and Credit Supply: Evidence From the Spanish Dynamic Provisioning Experiments.” Journal of Political Economy, 125 (2017), 2126–2177.CrossRefGoogle Scholar
Juelsrud, R. E., and Nenov, P. T.. “Dividend Payouts and Rollover Crises.” Review of Financial Studies, 33 (2019), 4139–4185.CrossRefGoogle Scholar
Juelsrud, R. E., and Wold, E. G.. “Risk-Weighted Capital Requirements and Portfolio Rebalancing.” Journal of Financial Intermediation, 41 (2020), 100806.CrossRefGoogle Scholar
Kelly, B.; Lustig, H.; and Van Nieuwerburgh, S.. “Too-Systemic-to-Fail: What Option Markets Imply About Sector-Wide Government Guarantees.” American Economic Review, 106 (2016), 1278–1319.CrossRefGoogle Scholar
Kisin, R., and Manela, A.. “The Shadow Cost of Bank Capital Requirements.” Review of Financial Studies, 29 (2016), 1780–1820.CrossRefGoogle Scholar
Krahnen, J.-P.; Noth, F.; and Schüwer, U.. “Structural Reforms in Banking: The Role of Trading.” Journal of Financial Regulation, 3 (2017), 66–88.CrossRefGoogle Scholar
Liikanen, E. “High-Level Expert Group on Reforming the Structure of the EU Banking Sector.” Final Report, Brussels (2012).Google Scholar
Löffler, G., and Raupach, P.. “Pitfalls in the Use of Systemic Risk Measures.” Journal of Financial and Quantitative Analysis, 53 (2018), 269–298.CrossRefGoogle Scholar
Mésonnier, J.-S., and Monks, A.. “Did the EBA Capital Exercise Cause a Credit Crunch in the Euro Area?” International Journal of Central Banking, 11 (2015), 75–117.Google Scholar
Mora, R., and Reggio, I.. “Treatment Effect Identification Using Alternative Parallel Assumptions.” Working Paper, available at https://econpapers.repec.org/paper/ctewerepe/we1233.htm (2012).Google Scholar
Nistor Mutu, S., and Ongena, S.. “The Impact of Policy Interventions on Systemic Risk Across Banks.” Working Paper, Babeş-Bolyai University of Cluj-Napoca (2018).Google Scholar
Noss, J., and Sowerbutts, R.. “The Implicit Subsidy of Banks.” Bank of England Financial Stability Paper No. 15 (2012).Google Scholar
Rabemananjara, R., and Zakoïan, J.-M.. “Threshold ARCH Models and Asymmetries in Volatility.” Journal of Applied Econometrics, 8 (1993), 31–49.CrossRefGoogle Scholar
Sarin, N., and Summers, L.. “Understanding Bank Risk through Market Measures,” Brookings Papers on Economic Activity, Fall (2016), 57–109.CrossRefGoogle Scholar
Schäfer, A.; Schnabel, I.; and di Mauro, B. Weder. “Financial Sector Reform after the Subprime Crisis: Has Anything Happened?” Review of Finance, 20 (2016), 77–125.CrossRefGoogle Scholar
Schmidt, C. “Bank Leverage, Capital Requirements and the Implied Cost of (Equity) Capital.” Working Paper, University of Mannheim (2019).CrossRefGoogle Scholar
Yellen, J. “Keynote Address From Janet Yellen on the Tenth Anniversary of the Financial Crisis.” Brookings (2018).Google Scholar
Zhang, Q.; Vallascas, F.; Keasey, K.; and Cai, C.. “Are Market-Based Measures of Global Systemic Importance of Financial Institutions Useful to Regulators and Supervisors?” Journal of Money, Credit and Banking, 47 (2015), 1403–1442.CrossRefGoogle Scholar
Supplementary material: PDF

Bostandzic et al. supplementary material

Bostandzic et al. supplementary material

Download Bostandzic et al. supplementary material(PDF)
PDF 4.2 MB