Template-Type: ReDIF-Paper 1.0
Author-Name: Mikael Juselius
Author-X-Name-First: Mikael
Author-X-Name-Last: Juselius
Author-Name: Aurea Ponte Marques
Author-X-Name-First: Aurea
Author-X-Name-Last: Ponte Marques
Author-Name: Nikola Tarashev
Author-X-Name-First: Nikola
Author-X-Name-Last: Tarashev
Title: Banks' regulatory risk tolerance
Abstract: In managing their capital, banks balance the risk of breaching regulatory requirements against the cost of maintaining and speedily restoring "management" buffers. Using 68 quarters of data on 17 US and 17 euro-area banks, we find systematic reductions in steady-state management buffer targets and attendant rises in regulatory risk tolerance (RRT) following the Great Financial Crisis (GFC). This phenomenon is particularly pronounced at banks with higher capital requirements post GFC. In parallel, banks facing more volatile management buffer shocks set higher management buffer targets, suggesting that RRT is a conscious choice. High-RRT banks tend to respond to a depletion of their management buffers by cutting lending, whereas low-RRT banks reduce the riskiness of their assets in other ways - thus highlighting real-economy effects of capital management strategies.
Creation-Date: 2025-09
File-URL: https://www.bis.org/publ/work1287.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1287.htm
File-Format: text/html
Number: 1287
Keywords: capital management, management buffer target, speed of reversion, regulatory regimes
Classification-JEL: G21, G28, E51, G31
Handle: RePEc:bis:biswps:1287