Banks’ regulatory risk tolerance

Aurea Marques, Mikael Juselius and Nikola Tarashev

No 3161, Working Paper Series from European Central Bank

Abstract: We employ 68 quarters of data – including from non-public supervisory sources – to study how 17 US and 17 euro-area banks balance the risk of breaching regulatory requirements against the cost of maintaining and speedily restoring “management” buffers. We find that steady-state management buffer targets systematically declined and regulatory risk tolerance (RRT) rose following the Great Financial Crisis, especially at banks experiencing a stronger increase in capital requirements. As a sign that RRT is a conscious choice, banks facing more volatile management buffer shocks set higher management buffer targets. High-RRT banks tend to respond to a depletion of their management buffers by cutting lending, whereas low-RRT banks reduce the riskiness but not the volume of their assets — thus highlighting real-economy effects of capital management strategies. JEL Classification: G21, G28, E51, G31

Keywords: bank regulation; capital management; management buffer target; speed of reversion (search for similar items in EconPapers)
Date: 2025-12
Note: 3594456
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Related works:
Working Paper: Banks' regulatory risk tolerance (2025)
Working Paper: Banks' regulatory risk tolerance (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253161

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