The impact of capital requirements on bank capital

Ugo Albertazzi, Aurea Ponte Marques, Aurora Abbondanza and Giulia Leila Travaglini

No 3128, Working Paper Series from European Central Bank

Abstract: This paper presents the first causal evidence on how banks adjust their voluntary capital buffers (the capital headroom above the required level) in response to changes in capital requirements. Using granular euro area data and exploiting the threshold-based assignment of Other Systemically Important Institution (O-SII) buffers within a regression discontinuity design, we study the liability side of banks’ balance sheets, complementing the asset-focused literature on lending and risk-taking. This allows us to assess whether capital regulation is effective in enhancing bank resilience, arguably its main objective. We find that banks offset about half of higher capital requirements by cutting their voluntary buffers rather than raising new equity. The offsetting effect is more pronounced among banks with weaker balance sheets, particularly those with higher levels of non-performing loans. These results indicate that regulation aimed at strengthening resilience may be only partially effective, as banks use existing voluntary buffers when subject to higher requirements. JEL Classification: E44, E51, E58, G21, G28

Keywords: capital buffers; higher requirements; macroprudential policy; voluntary buffer (search for similar items in EconPapers)
Date: 2025-10
Note: 451871
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3128~e95071d333.en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253128

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().