Supranational regulation, national forbearance? Evidence from a Quasi-Natural Experiment

Author: Reint Gropp (Halle Institute for Economic Research), Thomas Mosk (Goethe University), Steven Ongena (University of Zurich), Ines Simac (KU Leuven), Carlo Wix (Federal Reserve Board)

Title: Supranational regulation, national forbearance? Evidence from a Quasi-Natural Experiment

Abstract: We study the effect of stricter supranational requirements on the incentives of national authorities to exhibit forbearance. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that national authorities are more likely to forbear treated banks, allowing them to increase their regulatory capital without a commensurate increase in book equity, which accounts for a substantial share of the increase in their reported capital ratios. We provide evidence that forbearance is more pronounced in countries in which national supervisors have more power to exercise leniency towards banks.