Supranational Rules, National Discretion: Increasing Versus Inflating Regulatory Bank Capital?

Abstract We study how banks use “regulatory adjustments” to inflate their regulatory capital ratios and whether this depends on forbearance the part of national authorities. Using 2011 EBA exercise as a quasi-natural experiment, we find that substantially inflated levels via reduction in adjustments (without commensurate increase book equity without bank risk). document substantial heterogeneity inflation across countries, suggesting authorities forbear domestic meet supranational requirements, with focus short-term economic considerations.