Banks' regulatory risk tolerance

Overview

The study examines how banks' regulatory risk tolerance (RRT) evolved post-GFC, focusing on management buffer targets and their impact on capital management strategies. Using data from 34 US and 34 euro-area banks over 68 quarters, the research highlights significant shifts in RRT.

Key Insights

• Increased RRT Post-GFC: Banks systematically increased their RRT after the GFC, primarily by reducing management buffer targets.
• Volatility and Strategic Choices: Banks experiencing volatile management buffer shocks set higher buffer targets and faster reversion speeds, suggesting deliberate strategic choices.
• Impact on Lending: High-RRT banks respond to buffer depletion by cutting lending, while low-RRT banks adjust asset riskiness, affecting the real economy.

Why It Matters

Understanding RRT is crucial for banking professionals as it influences capital management strategies and lending behaviors, impacting economic stability.

Actionable Implications

• Monitor and adjust management buffer targets to align with regulatory changes.
• Consider the impact of RRT on lending strategies and economic contributions.
• Evaluate the volatility of management buffers to inform strategic decisions.