Banks respond differently to capital target deviations, ECB paper shows
There are notable asymmetries in banks' reactions to deviations from optimal capital levels, an ECB working paper shows.
Banks "prefer to reshuffle risk-weighted assets or increase asset holdings" when they are above their optimal Tier I ratio, Christoffer Kok and Glenn Schepens write in Bank reactions after capital shortfalls, whereas when they are below target, they "try to increase equity levels or reshuffle risk-weighted assets without changing asset holdings".
The paper investigates whether
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