scholarly journals Discretionary Capital Buffers and Bank Risk

2020 ◽  
Author(s):  
Martien Lubberink
Keyword(s):  
Stress Test ◽  
Positive Association ◽  
Capital Requirements ◽  
Bank Risk ◽  
Test Results ◽  
Single Supervisory Mechanism ◽  
European Banking Authority ◽  
European Banking ◽  
European Banks ◽  
The Difference

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.

scholarly journals Discretionary Capital Buffers and Bank Risk

2020 ◽  
Author(s):  
Martien Lubberink
Keyword(s):  
Stress Test ◽  
Positive Association ◽  
Capital Requirements ◽  
Bank Risk ◽  
Test Results ◽  
Single Supervisory Mechanism ◽  
European Banking Authority ◽  
European Banking ◽  
European Banks ◽  
The Difference

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.

Are Risk-Based Capital Requirements Detrimental to Corporate Lending?

2018 ◽  
Author(s):  
Brunella Bruno ◽  
Giacomo Nocera ◽  
Andrea Resti
Keyword(s):  
Asset Allocation ◽  
Business Models ◽  
Capital Requirements ◽  
Financial Repression ◽  
European Banking ◽  
European Banks ◽  
Corporate Loan ◽  
Capital Regulations ◽  
Asset Allocations ◽  
The Impact

In this chapter, we summarize the main results of a recent empirical research concerning European banks. We first explore the main drivers of the differences in risk-weighted assets (RWAs) across a sample of fifty large European banking groups. We then assess the impact of RWA-based capital regulations on those banks’ asset allocations in 2008–14. We find that risk weights are affected by bank size, business models, and asset mix. We also find that the adoption of internal ratings-based (IRB) approaches is an important driver of RWAs and that national segmentations explain a significant (albeit decreasing) share of the variability in risk weights. As for the impact of internal ratings on banks’ asset allocation in 2008–14, we uncover that banks using IRB approaches more extensively have reduced more (or increased less) their corporate loan portfolio. This effect is somewhat stronger for banks located in Eurozone periphery countries during the 2010–12 sovereign crisis. We do not find evidence, however, of internal models producing a reallocation from corporate loans to government exposures, suggesting that other motives prevailed in driving banks towards sovereign bonds during the Eurozone sovereign crisis, including the so-called ‘financial repression’ channel.

scholarly journals European Banking Union and bank risk disclosure: the effects of the Single Supervisory Mechanism

2021 ◽  
Author(s):  
Yener Altunbaş ◽  
Salvatore Polizzi ◽  
Enzo Scannella ◽  
John Thornton
Keyword(s):  
Bank Risk ◽  
Banking Union ◽  
Risk Disclosure ◽  
Exogenous Shock ◽  
Bank Supervision ◽  
Single Supervisory Mechanism ◽  
European Banking Union ◽  
European Banking ◽  
Bank Disclosure ◽  
The Impact

AbstractThis paper provides evidence on the impact of European Banking Union (BU) and the associated Single Supervisory Mechanism (SSM) on the risk disclosure practices of European banks. The onset of BU and the associated rules are considered as an exogenous shock that provides the setting for a natural experiment to analyze the effects of the new supervisory arrangements on bank risk disclosure practices. A Difference-in-Differences approach is adopted, building evidence from the disclosure practices of systemically important banks supervised by the European Central Bank (ECB) and other banks supervised by national regulators over the period 2012–2017. The main findings are that bank risk disclosure increased overall following BU but there was a weakening of disclosure by SSM-supervised banks relative to banks supervised by national authorities. We also find that the overall positive effect of the BU on bank disclosure is stronger for less profitable banks and in the most troubled economies of the Eurozone (GIPSI countries), while the negative effect on centrally supervised banks is stronger if bank CEOs act also as chairmen (CEO duality). We interpret these findings in light of the fact that the new institutional arrangements for bank supervision under which the ECB relies on local supervisors to collect the information necessary to act gives rise to inefficiencies with respect to the speed and completeness of the information flow between SSM supervised banks and the ECB, which are reflected in bank disclosure practices.

scholarly journals The impact of the European Banking Union’s Single Supervisory Mechanism on corporate governance practices in European banks

2018 ◽  
Vol 13 (2) ◽  
pp. 164-177 ◽  
Author(s):  
Udo Braendle
Keyword(s):  
Corporate Governance ◽  
Banking System ◽  
Banking Union ◽  
Single Supervisory Mechanism ◽  
European Banking Union ◽  
Regulatory Changes ◽  
Governance Practices ◽  
European Banking ◽  
European Banks ◽  
The Impact

Weak corporate governance in financial institutions has been a contributing factor of the financial crisis. The topic has, therefore, become the key priorities of banking supervision, because one of the takeaways was that. The article gives an overview about the newly established European Banking Union and about its structure focusing on the first pillar, the Single Supervisory Mechanism (SSM). In a second step, the focus is laid on the recent regulatory changes regarding corporate governance, the related supervisory practice and implications for European banks. Overall, the conducted changes in the regulatory framework, especially regarding corporate governance, seem to meet the objective of ensuring safety and soundness of the European banking system. Room for improvement is found regarding proportionality and transparency of the supervisory practices as well as its influence on banks’ profitability.

scholarly journals Malta

2019 ◽  
Vol 19 (350) ◽  
Author(s):  
Keyword(s):  
Euro Area ◽  
Stress Testing ◽  
Business Models ◽  
Banking Sector ◽  
Stress Test ◽  
Financial System ◽  
Stress Tests ◽  
European Banking Authority ◽  
European Banking ◽  
Shed Light

The Malta FSAP stress testing exercise took place immediately following the IMF’s 2018 Euro Area FSAP and concurrently with the 2018 stress test of the European Banking Authority (EBA). A comprehensive set of stress tests and interconnectedness analyses were conducted to assess the resilience of Malta’s financial system and shed light on potential vulnerabilities, complementing the euro area FSAP and EBA exercises by tailoring the scope and depth to the Maltese financial system. The solvency stress test covered 11 banks representing 93 percent of the banking sector assets (excluding foreign branches) and diverse business models.

Banking Overleveraging and Macro Instability: A Model and VSTAR Estimations

2016 ◽  
Vol 236 (6) ◽  
Author(s):  
Frauke Schleer ◽  
Willi Semmler
Keyword(s):  
Financial Crisis ◽  
Banking Sector ◽  
Capital Requirements ◽  
Banking Union ◽  
Star Model ◽  
European Banking Union ◽  
Regulatory Policies ◽  
European Banking ◽  
The Difference ◽  
Run Up

Abstract:Overleveraging of the banking sector has been considered one of the main causes of the 2007–09 financial crisis and the subsequent great recession. It was also of major concern for the subsequent BIS regulatory policies resulting in Basel III and its request for higher capital requirements. It has now become highly relevant for the planned European banking union. Overleveraging of the banking sector exposes the financial sector and the macroeconomy to vulnerabilities, but also, as critics state, seems to constrain credit flows to the private sector. We present here a measure of overleveraging, defined as the difference between actual and sustainable debt, conduct an empirical study on overleveraging for 40 banks in Europe, and study the vulnerabilities and credit contractions that can arise subsequently. Before the year 2004 overleveraging had not been a serious problem as leverage was on a sustainable level. However, in the run-up to the financial crisis, actual and optimal debt spread apart and the banking sector began to suffer from overleveraging. We use a non-linear Vector STAR model to evaluate the hypothesis that periods of increasing debt levels are accompanied by more severe credit constraints than periods of low leveraging. We demonstrate this for country groups across Europe.

scholarly journals An Emerging Credit Risk Framework

2020 ◽  
Vol 12 (5) ◽  
pp. 68
Author(s):  
Eleftherios Vlachostergios
Keyword(s):  
Credit Risk ◽  
Stress Test ◽  
Capital Requirements ◽  
Weight Functions ◽  
Test Results ◽  
Lifetime Horizon ◽  
Additional Advantage ◽  
Risk Framework ◽  
One Step ◽  
Credit Portfolio

The main result of this paper is the establishment of an analytic formula for the estimation capital requirements of an individual loan. The derived formula, may be considered as a direct analogue to the Basel risk-weight functions for credit risk, first presented in Basel II framework, with the additional advantage of utilizing a lifetime horizon, thus being suitable for IFRS9/GAAP purposes. Essentially, it bridges the gap between Basel and IFRS9 frameworks as: The 1-year horizon incorporated in the Basel PD is extended up to maturity, following the IFRS9 rationale; The notion of unexpected losses, already supplied by Basel Framework, is added to the IFRS9 logic in an analytic fashion. Going one step further, the generalization of the risk variables used in the formula, as Kumaraswamy identically distributed variables, allows for the benchmarking of the total loss of a credit portfolio, with the single knowledge of its current non-performing loans percentage. This conclusion is successfully verified against EBA stress test results for the period 2018-2020.

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