Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard

Dautović, Ernest

doi:10.2139/ssrn.3659873

Cited by 7 publications

(8 citation statements)

References 22 publications

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“…This is mainly because the pandemic crisis represents an exogenous shock to banks' market valuations and there was a massive release and other prudential changes to SII buffers in some countries, as explained in the previous subsection.34 This finding is in line withDautović (2020), who suggested that a phased-in increase in capital requirements raises the CET1 capital ratio, thereby improving resilience and loss-absorbing capacity.…”

mentioning

confidence: 65%

“…This result suggests that having SII status is itself positively perceived by markets and decreases the contribution to the systemic risk. 35 This outcome is to some extent contrary to Dautović (2020), who finds that being an SII is associated with potentially higher risk-taking on average. 36 Estimates of the interactions of SII ST AT with the different bank-related variables are relatively similar to those reported in Table 6.…”

mentioning

confidence: 89%

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Do buffer requirements for European systemically important banks make them less systemic?

Broto

Lafuerza

Melnychuk

2022

Documentos De Trabajo

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Buffers for systemically important institutions (SIIs) were designed to mitigate the risks posed by these large and complex banks. With a panel data model for a sample of listed European banks, we demonstrate that capital requirements for SIIs effectively reduce the perceived systemic risk of these institutions, which we proxy with the SRISK indicator in Brownlees and Engle (2017). We also study the impact of the adjustment mechanisms that banks use to comply with SII buffer requirements and their contribution to systemic risk. The results show that banks mainly respond to higher SII buffers by increasing their equity, as intended by the regulators. Once we control for the options SIIs employ to fulfil these requirements and SII characteristics (e.g. total asset size), we find a residual effect of having SII status. This result suggests that being an SII provides a positive signal to markets by further decreasing its contribution to systemic risk.

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confidence: 65%

mentioning

confidence: 89%

Do buffer requirements for European systemically important banks make them less systemic?

Broto

Lafuerza

Melnychuk

2022

Documentos De Trabajo

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show abstract

“…Further evidence is suggestive that the riskier bank assets, the more capital to be set aside to meet the regulatory minimum capital requirement (Dautovic 2020). Dautovic (2020) empirically revealed that risk behaviour invariable associated more significantly with large relatively less profit‐making banks in Europe. This finding is anchored on the ‘agency and resurrecting gamble ’ models.…”

Section: Literature and Hypotheses Developmentmentioning

confidence: 99%

“…Also, our study set forth to understand the dynamic implication of bank default risk on their regulatory capital requirement. In Dautovic (2020), furtherance to finding reported banking sector default probabilities can crowd out the risk of banks solvency over time. Thus, the empirical contribution of Admeti et al.…”

Section: Literature and Hypotheses Developmentmentioning

confidence: 99%

“…(2019) suggest embarking on capital‐induced macroprudential type policy for effective bank risk regulation. Thus, empirical evidence revealed that banks more generally tend to respond to the stringent capital requirement regarding their leverage and hence risk‐taking behaviour (Dautovic 2020). Thus, the hypothesis formulated in relation to the G7 countries is such that: Hypothesis 4 : Bank default probability increases with higher regulatory minimum capital. …”

Section: Literature and Hypotheses Developmentmentioning

confidence: 99%

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Determinants of bank capital adequacy: International evidence from G7 countries

et al. 2023

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The study presents the determinants of bank capital for the G7 countries from 1999 to 2017. It employs a dynamic ordinary least square panel methodology for empirical estimation. The findings suggest that bank capital to total asset, bank z‐score and the real output growth are positive determinants of bank regulatory capital. Conversely, bank return on assets is found to be a negative determinant. After constructing an index for profitability using the approach of the component analysis, the empirical result reveals an inverse relationship between bank profitability and the regulatory minimum capital. Diagnostic tests and robustness checks confirm the empirical consistency of the findings reported. Thus, in applying the panel pairwise causality test, the evidence of bi‐directional Granger causality suggests a feedback relationship for five significant scenarios and unidirectional nexus in others. For policy consideration, the results stressed the need for optimal due diligence weighing the benefit and cost implication of upward or downward adjustment of bank regulatory minimum capital.

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Capital Regulation, Bank Behavior, and Market Structure

VanHoose

2022

The Industrial Organization of Banking

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Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard

Cited by 7 publications

References 22 publications

Do buffer requirements for European systemically important banks make them less systemic?

Do buffer requirements for European systemically important banks make them less systemic?

Determinants of bank capital adequacy: International evidence from G7 countries

Capital Regulation, Bank Behavior, and Market Structure

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