The European Central Bank published a working paper presenting causal evidence on how euro area banks adjust their voluntary capital buffers, defined as capital headroom above regulatory requirements, when capital requirements increase. Using the threshold-based assignment of Other Systemically Important Institution (O-SII) buffers, the paper finds banks typically absorb a large share of higher requirements by reducing voluntary buffers rather than raising new equity. Exploiting a regression discontinuity design around European Banking Authority score cut-offs and confidential quarterly supervisory data for 278 euro area banks from 2014 Q4 to 2018 Q3, the authors estimate that a typical 0.5 percentage point increase in requirements is associated with around a 0.30–0.35 percentage point reduction in the voluntary Common Equity Tier 1 (CET1) buffer, implying an offset of roughly half to two thirds. The offsetting response is more pronounced for banks with weaker balance sheets, particularly those with higher non-performing loans, and the CET1 ratio shows no economically meaningful increase, indicating the residual adjustment is largely achieved through reductions in risk-weighted assets rather than additional equity issuance.
European Central Bank 2025-10-01
European Central Bank working paper finds banks offset higher capital requirements by cutting voluntary capital buffers
The European Central Bank's working paper analyzes how euro area banks adjust voluntary capital buffers to increased capital requirements. Banks typically reduce buffers rather than raise new equity, with a 0.5 percentage point increase in requirements leading to a 0.30–0.35 percentage point reduction in the Common Equity Tier 1 buffer. This adjustment is more pronounced in banks with weaker balance sheets, especially those with higher non-performing loans.