Has regulatory capital made banks safer? Skin in the game vs moral hazard
Ernest Dautovic ()
No 91, ESRB Working Paper Series from European Systemic Risk Board
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)
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Working Paper: Has regulatory capital made banks safer? Skin in the game vs moral hazard (2020)
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:srk:srkwps:201991
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