How individual capital requirements affect capital ratios in UK banks and building societies (original) (raw)
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2015
The baseline bank capital requirements in the United Kingdom are being set to comply with agreed international standards established in Basel III (as implemented in Europe through CRD IV). The minimum Tier 1 requirement to be met at all times is 6% of risk-weighted assets, comprised of at least 4.5% Common Equity Tier 1 and at most 1.5% Additional Tier 1 capital. Internationally-agreed buffers, on top of this minimum, can be used to absorb losses under stress. This paper assesses whether these baseline requirements are appropriate for the United Kingdom, given the characteristics of the banking system and economy, and taking into account other areas of regulatory change such as liquidity requirements, structural reform and, most notably, the recent development of a bank resolution regime and requirements for additional capacity to absorb losses in resolution. In November, G20 leaders endorsed standards agreed by the financial Stability Board for global systemically important banks t...
Banking System Adjustment to Regulatory Capital Requirements
Croatian Economic Survey, 2018
The main objective of this paper is to explore the adjustment of bank business activities to new regulatory capital requests using panel data analyses of the European banking system. The research hypothesis assumes that the increase in capital requirements affects the banks' balance sheet adjustment and bank lending to the non-financial sector. The banks can maintain the higher regulatory capital ratio by increasing the volume of share capital or by decreasing the risk-weighted assets and bank lending activities. The high equity premium upon a new equity issue due to asymmetric information about the bank's net worth discourages the current shareholder to issue additional capital, which has resulted in bank lending constraints and has increased non-risk bank assets. Banks' response to new capital requirements can announce a long-term negative impact to real
Ex ante capital position, changes in the different components of regulatory capital and bank risk
Applied Economics, 2013
We investigate the impact of changes in capital of European banks on their risktaking behavior from 1992 to 2006, a time period covering the Basel I capital requirements. We specifically focus on the initial level and type of regulatory capital banks hold. First, we assume that risk changes depend on banks' ex ante regulatory capital position. Second, we consider the impact of an increase in each component of regulatory capital on banks' risk changes. We find that, for highly capitalized and strongly undercapitalized banks, an increase in equity positively affects risk; but an increase in subordinated debt has the opposite effect namely for undercapitalized banks. Moderately undercapitalized banks tend to invest in less risky assets when their equity ratio increases but not when they improve their capital position by extending hybrid capital. Hybrid capital and equity have the same impact for banks with low capital buffers. On the whole, our conclusions support the need to implement more explicit thresholds to classify European banks according to their capital ratios but also to clearly distinguish pure equity from hybrid and subordinated instruments.
The Impact of Capital-Based Regulation on Bank Risk-Taking
Journal of Financial Intermediation, 1999
In this paper we model the dynamic portfolio choice problem facing banks, calibrate the model using empirical data from the banking industry for 1984-1993, and assess quantitatively the impact of recent regulatory developments related to bank capital. The model implies a U-shaped relationship between capital and risk-taking: As a bank's capital increases it first takes less risk, then more risk. A deposit insurance premium surcharge on undercapitalized banks induces them to take more risk. An increased capital requirement, whether flat or risk-based, tends to induce more risk-taking by ex-ante well-capitalized banks that comply with the new standard.
Changes in Capital and Risk: An Empirical Study of European Banks
In this paper, we investigate the impact of chang es in capital of European banks on their risk-taking behavior from 1992 to 2006. First , we assume that risk changes are different for 3 categories of banks (undercapitalized, adequately c apitalized and highly capitalized). Second, we consider the impact of an increase in each component of regulatory capital (equity, subordinated debt, hybrid capital) on banks' risk changes. We fi nd that, for undercapitalized banks, an increase in capital is associated with a decline in risk. We obtain the opposite result for adequately and highly capitalized banks with, moreover, a higher i ncrease in risk for adequately capitalized banks. Our findings also highlight that the decreas e in risk for undercapitalized banks only holds when banks increase their equity capital. Conversel y, an increase in subordinated debt or hybrid capital is associated with an increase in risk. On the whole, our conclusions support the policy recommendations for ...
The Regulation of Bank Capital: Do Capital Standards Promote Bank Safety
Journal of Financial Intermediation, 1996
We show that in an imperfect information environment the equity value of an impaired bank may increase or decrease when it is required to meet a capital standard. Regardless of the change in the bank's equity value, however, its stock price will fall in response to a forced recapitalization, consistent with recent empirical evidence. Simulations of our model suggest that this stock price decline is likely to be larger the smaller is the share of ownership held by the managers of the bank, also consistent with recent empirical evidence in the literature. Our model further predicts a rise in bank's non-interest expenses following a required recapitalization. Given the increase in the regulator's exposure that would accompany a reduction in the bank's market value of equity, the regulator may choose not to enforce the regulation. Hence, capital regulation may be timeinconsistent in this situation and consequently not have its intended risk-mitigating incentives.
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This study examines the speed of adjustment of the leverage and regulatory capital ratios between 2002 and 2018 for large commercial banks of the USA. The study applies a two-step system GMM technique to obtain the speed of adjustment. The results prove that higher-quality capital requires greater time to restore equilibrium after an economic shock. The results also show that large commercial banks adjust their regulatory ratios faster than leverage ratios. Furthermore, the speed of adjustment is heterogeneous for cross-sections. The speed of adjustment for well-capitalized banks is higher than adequately and undercapitalized commercial banks. The speed of adjustment for highly liquid is higher than low liquid banks. This study also finds the banks quickly adjust their capital before the crisis period. The heterogeneous results have implications for regulators, policymakers, and bank managers for better decision making.
How do large commercial banks adjust capital ratios: empirical evidence from the US?
Economic Research-Ekonomska Istraživanja, 2020
This research explores the balanced panel data to examine the level of capital adjustment for major insured commercial banks over the 2002-2018 period using a two-step GMM estimator. The findings show that the speed of adjustment of the large insured commercial banks is faster than that of non-financial companies. The results contribute to a slower average adjustment pace of a total capital ratio than the total risk-based capital and capital buffer ratios. The adjustment of capital is faster in the post-crisis period than during and before-crises era. The adequately capitalized banks adjust capital ratio faster than well-capitalized banks. In contrast, the under-capitalized banks adjust the total risk-based capital ratio and capital buffer ratio more quickly than that of others. The low liquid banks needed a higher time to restore equilibrium than high liquid banks. The results of this study have economic significance for policy implications and future regulations.