Reint Gropp, Thomas Mosk, Steven Ongena, Ines Simac, Carlo Wix, 14 February 2021

The implementation of supranational regulations at the national level often provides national authorities with substantial room to engage in discretion and forbearance. Using evidence from a supranational increase in bank capital requirements, this column shows that national authorities may assist banks' efforts to inflate their regulatory capital to pass such supranational requirements. While supranational rules should be binding in theory, national discretion may effectively undermine them in practice.

Rodrigo Coelho, Fernando Restoy, Raihan Zamil, 11 April 2020

Regulatory divergence in the banking sector, including differences in how jurisdictions apply Basel III and other regulatory standards, could be a significant source of market fragmentation. Unwarranted divergence in prudential requirements may discourage cross-border activities, international capital flows, and global risk-sharing. This column identifies three main sources of regulatory fragmentation in the post-Basel III era and proposes policy measures to reduce excessive discrepancies in the application of global banking rules. Maintaining trust in banks’ financial health is crucial in periods of economic and financial disruption – such as the COVID-19 pandemic.

Gabriele Cozzi, Matthieu Darracq Pariès, Peter Karadi, Jenny Körner, Christoffer Kok, Falk Mazelis, Kalin Nikolov, Elena Rancoita, Alejandro Van der Ghote, Julien Weber, 03 March 2020

Following the financial crisis, central banks and regulatory authorities assumed new powers to set macroprudential bank capital requirements. This column describes a number of macro models used by the ECB to measure the real impact of capital requirements and their interactions with monetary policy. It warns that a weaker banking system amplifies the impact of monetary policy and contributes to economic instability. Banks’ capital buffers are best augmented during times of affluence, when looser monetary policy can mitigate the costs of increasing capital requirements.

Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen, 25 April 2019

Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen, 06 February 2019

Denefa Bostandzic, Felix Irresberger, Ragnar Juelsrud, Gregor Weiss, 15 January 2018

Since the financial crisis, curbing systemic risk has become a key objective for policymakers around the world. This column sheds light on how successful capital requirements are in terms of reducing systemic risk, in the context of the European banking sector. Results show that an increase in capital requirements in Europe lead to heightened measures of systemic risk, in opposition to the goals of the exercise. This does not imply, however, that capital requirements are welfare decreasing.

David Martinez-Miera, Rafael Repullo, 08 December 2018

The current financial system is characterised by the coexistence of direct market finance, regulated banks, and shadow banks. This column looks at what gives rise to each of these sources of finance as well as the effect of bank capital regulation on the financing that flows through them. High 'flat' (or risk-insensitive) capital requirements shift intermediate-risk entrepreneurs from regulated banks to shadow banks, while high risk-based requirements do the same for high-risk entrepreneurs, increasing the risk of the corresponding loans. This result highlights the need to take into account the existence of shadow banks when designing bank capital regulation. 

Nijolė Valinskytė, Erika Ivanauskaitė, Darius Kulikauskas, Simonas Krėpšta, 12 April 2018

The leverage ratio requirement should supplement microprudential the risk-based capital requirements framework to serve as a backstop that ensures sufficient levels of equity in banks. However, the 3% level for this ratio should not be treated as the end-goal, as recent research on optimal capital levels points to substantially higher leverage ratios. This column examines the relationship between risk-based and leverage ratio requirements, and the motivation for the macroprudential use of leverage ratio requirements.

Natalia Tente, Natalja von Westernhagen, Ulf Slopek, 06 December 2017

Regulators are still debating the amount of capital needed to support bank losses in a financial crisis. This column presents a new, pragmatic stress-testing tool that can answer the question under macroeconomic stress scenarios. The method models inter-sector and inter-country dependence structures between banks in a holistic, top-down supervisory framework. A test of 12 major German banks as of 2013 suggests that while there is enough capital in the system as a whole, capital allocation among the banks is not optimal.

Yener Altunbaş, Simone Manganelli, David Marques-Ibanez, 14 November 2017

Prudential supervision of banks has increasingly relied on capital requirements. But bank capital played a relatively minor role in predicting bank solvency during the Global Crisis, except for scarcely capitalised banks. This column argues that while capital is a helpful tool to support bank financial stability, it is complex for supervisors to calibrate it precisely. Macroprudential authorities should be able to complement capital-based tools with additional, borrower-based prudential instruments.

John Vickers, 18 October 2017

How safe should banks be? In this video, John Vickers points out that regulators and academics have diverging points of view regarding banks' capital requirements. This video was recorded at the "10 years after the crisis" conference held in London, on 22 September 2017.

Banu Demir, Tomasz K. Michalski, Evren Örs, 20 January 2017

The negative impact of higher capital requirements under Basel II on the provision of trade finance has been cited as one of the factors behind the Great Trade Collapse. This column exploits the adoption of the Basel II framework in Turkey in 2012 to investigate how a shock to the supply of trade-specific finance (in this case, letters of credit) affected firm-level exports. Changes in the cost of letters of credit affected Turkish firms’ reliance on trade finance, but the regulatory shock did not affect firm-level export growth.

Stephen Cecchetti, Kim Schoenholtz, 15 August 2016

The UK’s Brexit referendum is providing us with the first significant test of the new regulatory system. This column asks whether banks have sufficient capital and liquidity to withstand the ‘shock’. Unless the global financial system as a whole is well capitalised, it remains only as strong as its weakest link.  And while the UK authorities have done a reasonable job of strengthening their banks and financial system, a number of large European banks are seriously undercapitalised.  

Kebin Ma, 09 May 2016

Bank liquidity is a key component of the post Global Crisis environment. In this video, Kebin Ma discusses the interaction between market liquidity risk and funding liquidity risk. Capital requirements for preventing bank losses might not be as effective as we thought. The video was recorded in April 2016 at the First Annual Spring Symposium on Financial Economics organised by CEPR and the Brevan Howard Centre at Imperial College.

David Miles, 03 May 2016

Capital requirements for banks are a key issue in the post-Crisis environment. In this video, David Miles discusses the importance of creating incentives for banks to start using equity rather than debt to finance themselves. The combination of asymmetric information and limited liability can give banks an incentive to take on more risk; capital requirements would force banks to take on less risk. This video was recorded in April 2016 at the First Annual Spring Symposium on Financial Economics organised by CEPR and the Brevan Howard Centre at Imperial College.

Avinash Persaud, 14 April 2016

Since the breakup of Bretton Woods in the early 1970s, the housing market has been at the centre of the biggest banking crises across the world. This column considers the nexus between housing, banking, and the economy, and how these ties can be broken. It argues for two modest regulatory changes in banking and insurance. These would result in life insurers and pension funds providing mortgage finance, better insulating the economy and homeowners from the housing cycle.

Jochen Andritzky, Niklas Gadatsch, Tobias Körner, Alexander Schäfer, Isabel Schnabel, 04 March 2016

The excessive exposure of banks to sovereign debt continues to threaten the stability of the Eurozone. Based on a recent proposal by the German Council of Economic Experts, this column suggests steps towards severing the sovereign-bank nexus. The loss-absorption capacity of banks could be increased through risk-adjusted large exposure limits and risk-adequate capital requirements.

John Vickers, 15 February 2016

Much stronger capital buffers are fundamental to banking reform. But seven years on from the Global Crisis, the question of how much stronger has not been fully decided. This column reviews the Bank of England’s recently published framework for the systemic risk buffer. It is suggested that the Bank should go further than it proposes, and require stronger capital buffers for systemically-important retail banks.

Dennis Bams, Magdalena Pisa, Christian Wolff, 16 December 2015

Small businesses are the engine of innovation and job creation, and Basel regulation acknowledges their special role and discounts the capital requirements for loans to small firms. This column argues that the Basel requirements overstate the riskiness of small businesses, and that retail exposures are a much safer investment than previously thought. By forcing banks to hold a disproportionately higher amount of capital against such loans, Basel can unintentionally harm lending to small private firms.  


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