Staff Working Paper No. 946
By Tirupam Goel, Ulf Lewrick and Aakriti Mathur
Profitability shapes banks’ responses to higher capital requirements. It underpins the opportunity cost of downsizing and the ability to generate capital. We assess its role based on a major reform, using textual analysis to identify the timing of banks’ responses. Consistent with our model, less profitable banks contract in response to higher capital surcharges. Banks near the regulatory thresholds that determine the surcharges shrink further. More profitable banks, conversely, continue to increase their systemic importance. The reallocation of activity to these banks can improve efficiency. However, these banks have also been more exposed to tail risk during the Covid crisis.
This version was updated in June 2022.
Does regulation only bite the less profitable? Evidence from the too-big-to-fail reforms
