Do Capital Requirements Make Banks Safer? Evidence From a Quasi-Natural Experiment

37 Pages Posted: 7 Oct 2017 Last revised: 5 Jan 2021

See all articles by Denefa Bostandzic

Denefa Bostandzic

Heinrich Heine University Dusseldorf

Felix Irresberger

Durham University

Ragnar Juelsrud

Norges Bank

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: January 3, 2021

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.

Keywords: Capital requirements, regulation, banks, risk, Basel III

JEL Classification: G01, G21, G28

Suggested Citation

Bostandzic, Denefa and Irresberger, Felix and Juelsrud, Ragnar and Weiss, Gregor N. F., Do Capital Requirements Make Banks Safer? Evidence From a Quasi-Natural Experiment (January 3, 2021). Leeds University Business School Working Paper No. 18-02, Available at SSRN: https://ssrn.com/abstract=3048305 or http://dx.doi.org/10.2139/ssrn.3048305

Denefa Bostandzic

Heinrich Heine University Dusseldorf ( email )

Universitätsstrasse 1
Duesseldorf, DE NRW 40225
Germany

Felix Irresberger

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

Ragnar Juelsrud (Contact Author)

Norges Bank ( email )

Bankplassen 2
Oslo, 0151
Norway

HOME PAGE: http://ragnar.juelsrud.no

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
547
Abstract Views
2,654
Rank
92,639
PlumX Metrics