Staff Working Paper No. 946
By Tirupam Goel, Ulf Lewrick and Aakriti Mathur
What shapes banks’ response to capital requirement reforms? While pre‑reform capitalisation is important in the short term, we posit that profitability is key in the medium term, as it underpins banks’ capacity to build capital. We examine the impact of capital surcharges on systemically important banks. Through a novel application of textual analysis to identify when banks react, we show that less profitable banks contract when faced with higher requirements, especially if they are closer to the thresholds that determine their surcharges. Conversely, more profitable banks continue to expand, improving banking efficiency but raising concerns about concentration and exposure to tail risks.
This version was updated in October 2024.
Does regulation only bite the less profitable? Evidence from the too-big-to-fail reforms
