Bank regulation and risk in Europe and Central Asia since the global financial crisis

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Abstract

This paper examines changes in bank capital and capital regulations since the global financial crisis, in the Europe and Central Asia region. It shows that banks in Europe and Central Asia are better capitalized, as measured by regulatory capital ratios, than they were prior to the crisis. However, the increase in simple equity ratios for the same banks has been smaller over the past 10 years. The increases in regulatory capital ratios have coincided with a reduction in the stringency of the definition of Tier 1 capital and reduction in risk-weights. We further analyze the relationship between bank capital and bank risk using individual bank data. We show that bank risk in Europe and Central Asia is more sensitive to changes in simple leverage ratios than changes in regulatory capital ratios, consistent with the notion that equity ratios only include high-quality capital and do not rely on internal risk models to compute risk-weights. Although there has been some effort to increase capital and liquidity requirements for institutions deemed systemically important, the region has been lagging in addressing the resolution of these institutions. In line with Demirguc-Kunt, Detragiache, and Merrouche (2013), our findings show the importance of the definition of bank capital to assure bank financial stability in Europe and Central Asia.

Keywords: Banking Regulation, Banking Supervision, Bank Capital, Basel Capital Requirements, Financial Stability

Authors’ individual contribution: Conceptualization – A.D.-K.; Methodology – D.A.; Software – D.S.M.; Formal Analysis – D.A. and D.S.M.; Investigation – D.A. and D.S.M.; Data Curation – D.S.M.; Writing – Original Draft – D.A., A.D.-K., and D.S.M.; Writing – Review & Editing – D.A., A.D.-K., and D.S.M.; Visualization – D.A. and D.S.M.; Supervision – A.D.-K.; Project Administration – D.A.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

Acknowledgements: We are grateful to Miquel Dijkman, Nadeem M. Karmali and Isfandyar Zaman Khan for useful suggestions and comments. We also thank Alena Kantarovich and Raquel Alejandra Letelier for providing the data on state-ownership of banks in developing Europe and Central Asia. This paper’s findings, interpretations and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, their executive directors, or the countries they represent. This research was supported by a grant from the Knowledge for Change Program at the World Bank.

JEL Classification: G18, G21, G28, E58

Received: 06.02.2020
Accepted: 23.04.2020
Published online: 30.04.2020

How to cite this paper: Anginer, D., Demirgüç-Kunt, A., & Mare, D. S. (2020). Bank regulation and risk in Europe and Central Asia since the global financial crisis. Risk Governance and Control: Financial Markets & Institutions, 10(1), 75-93. https://doi.org/10.22495/rgcv10i1p6