Max Headroom: Discretionary Capital Buffers and Bank Risk
Martien Lubberink ()
MPRA Paper from University Library of Munich, Germany
This paper examines the association between discretionary capital buffers, capital requirements, and risk for European banks. The discretionary buffers are banks' own buffers, or headroom: the difference between reported and required capital. I exploit capital requirements data that banks started to disclose since the release of a 2015 European Banking Authority opinion. Results using detailed SREP and Pillar 2 data of the largest 99 European banks over 2013-2019 show that less headroom is associated with increased bank risk. An additional examination reveals a positive association between headroom and stress test results for banks subjected to the Single Supervisory Mechanism, a result that runs against supervisory requirements.
Keywords: Banking; European Banks; Pillar 2 requirements; SREP (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:100445
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