How do markets react to tighter bank capital requirements?

Cyril Couaillier and Dorian Henricot

Journal of Banking & Finance, 2023, vol. 151, issue C

Abstract: We use hikes in the countercyclical capital buffer [CCyB] to measure how markets react to tighter bank capital requirements. Our identification strategy relies on two unique features of the CCyB institutional framework in Europe. First, all national authorities make quarterly announcements of CCyB rates. Second, these hikes affect all European banks proportionally to their exposure to the country of activation. We show that CCyB hikes translate in lower CDS spreads for affected banks, in particular those poorly capitalised. On the other hand, bank valuations do not react. Markets therefore consider that higher countercyclical capital requirements make banks more stable at no material cost for shareholders. We claim that these effects relate to the capital constraint itself, as opposed to the potential signal conveyed on the state of the financial cycle.

Keywords: Event studies; Banking; Capital requirements (search for similar items in EconPapers)
JEL-codes: G14 G21 G28 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:151:y:2023:i:c:s0378426623000572

DOI: 10.1016/j.jbankfin.2023.106832

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