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

Arbeitspapier

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.

Object Details

• ISBN: 978-92-899-4367-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2449

Classification and Topics

• Classification: Wirtschaft ; Money Supply; Credit; Money Multipliers ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation ; Economywide Country Studies: Europe
• Subject: capital requirements ; macroprudential policy ; risk-taking ; impact evaluation ; difference-in-difference

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dautovic, Ernest
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2020

Further information

• DOI: doi:10.2866/002634
• Handle: http://hdl.handle.net/10419/229063
• Last update: 10.03.2025, 11:43 AM CET