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The capital buffer calibration for other systemically important institutions‐Is the country heterogeneity in the EU caused by regulatory capture?

Michael Sigmund

Scottish Journal of Political Economy, 2022, vol. 69, issue 5, 533-563

Abstract: In this article, we discuss how the too‐big‐to‐fail dilemma for large financial institution is addressed in the regulatory framework and how (differently) regulators in the EU apply it. The European Banking Authority (EBA) has devised a buffer guideline for identifying other systemically important institutions (OSIIs) to address this issue. This guideline defines how to identify OSIIs by a scoring process but does not specify how to map these scores into additional capital buffers. In this study, we empirically show that the OSII buffer assignment is very heterogeneous in Europe. First, based on all EU banks that were classified as OSIIs, we show that the OSII score has less impact on the OSII buffer than the headquarter country dummy. Second, if all countries applied the German OSII buffer assignment, the additional capital requirements in the euro area would increase by 90 bn EUR. Third, we analyze whether our results could be explained by regulatory capture which is measured by supervisory quality, supervisory funding, importance/concentration of the banking system, and political orientation of the government. We find among others that supervisory quality and supervisory funding without banks' participation increase OSII buffers significantly.

Date: 2022
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Handle: RePEc:bla:scotjp:v:69:y:2022:i:5:p:533-563