Max Headroom: Discretionary Capital Buffers and Bank Risk

Max Headroom: Discretionary Capital Buffers and Bank Risk

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Event type: Seminars

8 October 2020 from 12.30 pm - 1.30 pm 8 Oct 2020 12:30 pm 8 Oct 2020 1:30 pm

RH103, Level 1, Rutherford House (Pipitea Campus)

Speaker: Martien Lubberink (Associate Professor, School of Accounting and Commercial Law, Victoria University of Wellington)

Martien Lubberink profile
Associate Professor Martien Lubberink

Associate Professor Martien Lubberink completed his PhD in Economics at Groningen University. He has since worked at Lancaster University. After his sabbatical year at UNC Chapel Hill, Dr. Lubberink joined De Nederlandsche Bank, the central bank of the Netherlands. Here he contributed to the development of post-GFC regulatory capital standards and regulatory capital disclosure standards for banks worldwide and for banks in Europe (Basel III and CRD IV respectively). He also acquired comprehensive expertise on intra-group finance and on capital instrument issuances that qualify for Tier 1 and Tier 2 regulatory bank capital. Dr. Lubberink regularly writes for interest.co.nz, New Zealand’s largest financial website. He has contributed to the international and national financial press: Bloomberg, The Economist, Euromoney, the Financial Times, Risk Magazine, SNL Financial, The Wall Street Journal, Stuff.co.nz, NewsRoom.co.nz, National Business Review. He advises banks, central banks, and ministries on bank supervision and regularly contributes to panel discussions on bank capital.

Abstract: This paper examines the association between discretionary capital buffers, capital requirements, and risk for the largest 99 European banks over 2013-2020. Discretionary buffers are banks’ own buffers, or headroom: the difference between reported and required capital. I exploit detailed SREP and Pillar 2 data that banks disclose since the release of a 2015 European Banking Authority opinion. Against the backdrop of increasing capital requirements, I 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 supervised by the ECB, a result that runs against supervisory requirements. In all, my paper shows further limits of the effectiveness of bank capital requirements.