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Max Headroom: Discretionary Capital Buffers and Bank Risk

Martien Lubberink ()

MPRA Paper from University Library of Munich, Germany

Abstract: 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)
Date: 2020-05-17
New Economics Papers: this item is included in nep-ban and nep-rmg
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