European bank capital management in response to regulatory requirements

Abstract: This document constitutes of two theses to fulfil Stockholm School of Economics requirements for the Double Degree Programme in Finance between Stockholm School of Economics (Home School) and Universita` Commerciale Luigi Bocconi (Host School). The first thesis examines the association between regulatory capital requirements and the management buffers of European banks. I examine unbalanced semi-annual multi-country panel data of 57 European banks during the period from 2016-2020. I collect public information on bank-specific capital requirements to assess their role in setting management buffers. I show that higher capital requirements are associated with lower management buffers, but the sensitivity is less than one to one. Overall, it appears that banks tend to adjust capital ratio levels in response to changes in applicable formal capital requirements, but only slightly reduce management buffers, thus keeping them relatively stable. However, banks tend to hold additional buffers to cover expected long-term requirements e.g., requirements applicable after phase-in periods. The second thesis focuses on the association between bank regulatory capital requirements and the balance sheet adjustment of European banks. Specifically, I test if additional bank-specific capital requirements tend to affect the growth of risk-weighted assets, regulatory capital assets, and gross loans. While additional capital requirements appear to have a direct negative effect on the growth of risk-weighted assets and the growth of regulatory capital, the analysis does not show evidence for a similar impact on the growth of total assets and gross loans. However, if banks are assumed to hold the voluntary capital buffers constant then the negative effect on the growth of risk-weighted assets is even larger, while the overall effect on the growth of regulatory capital is zero.