Has regulatory capital made banks safer? Skin in the game vs moral hazard

Ernest Dautović

No 2449, Working Paper Series from European Central Bank

Abstract: The paper evaluates the impact of a phased-in introduction of capital requirements on equity, risk-taking, and probability of default for a sample of European systemically important banks. Contrary to the case of a one-off introduction of capital requirements, this study does not find evidence of deleveraging through asset sales. A phased-in tightening promotes adjustment to lower leverage via an increase in equity thereby improving resilience and loss absorption capacity. The higher resilience comes at the cost of a portfolio reallocation towards riskier assets. Consistently with models on agency costs and gambling for resurrection, the risk-taking is driven by large and less profitable banks. The net impact on bank probabilities of default is positive albeit statistically insignificant, suggesting that risk-taking may crowd-out solvency. JEL Classification: E51, G21, G28, O52

Keywords: capital requirements; difference-in-difference; impact evaluation; macroprudential policy; risk-taking (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban
Note: 2777855
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202449

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