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

Denefa Bostandzic, Felix Irresberger, Ragnar Juelsrud and Gregor Weiß

Journal of Financial and Quantitative Analysis, 2022, vol. 57, issue 5, 1805-1833

Abstract: 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.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:57:y:2022:i:5:p:1805-1833_5

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