Weekly Economics Seminar by Aakriti Mathur
February 19 @ 1:30 pm - 2:40 pm
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Title: In the danger zone! Regulatory uncertainty and voluntary bank capital surpluses
Speaker: Aakriti Mathur, Ph.D. Candidate, The Graduate Institute, Geneva
Abstract: Banks voluntarily hold substantially more capital than required by regulators. Understanding why is important for forecasting the extent to which banks would use this surplus to support lending in a crisis, and for calibrating macro-prudential policy. This paper studies the role of uncertainty about the requirements themselves, which could heighten any precautionary motive to avoid accidental breach of minimum requirements. We construct two measures of regulatory uncertainty: one at bank-level based on confidential regulatory data; another at sector-level based on news-media text. These correlate with more general uncertainty measures from the literature, but also contain distinct information. Using regulatory data on UK banks between 1989-2013, we find that a one standard deviation increase in regulatory uncertainty – by either measure – increases banks’ voluntary capital surpluses by 0.8 to 2 percentage points on average. This effect is three times stronger when surpluses are smaller, that is, for banks in the “dangerzone”. Given a Basel I minimum capital requirement of 8%, our results are economically meaningful.