Capital Requirements: A Pillar or a Burden for Bank Competitiveness? (European Central Bank)

Summary

• Capital requirements have no statistically significant effect on profit efficiency, while capital ratios show an inverted U-shape with a threshold at a CET1 ratio of around 18%.p.3
• The final dataset comprises 35 listed significant institutions operating in ten euro area countries.p.12
• The median CET1 ratio rose from slightly below 13% in 2015 to around 16% in 2024.p.13
• Capital requirements in the sample had a median of around 11%, well below the median capital ratio of around 16%.p.8
• The mean profit efficiency score stood at 0.73 and the median at 0.74.p.17
• The share of interest expenses in bank inputs rose from less than 20% in 2021 to approximately 45% by 2024.p.15
• Median profit efficiency rose sharply from late 2022, reaching around 0.83 by 2024.p.18

Key insights

1. The level of capital requirements does not have an impact on bank profit efficiency.p.7
2. The result held when capital requirements were split into microprudential (TSCR) and macroprudential (CBR) components.p.7
3. Extending the sample to unlisted banks and using the cost-to-income ratio did not alter the results.p.8
4. Profit efficiency rose with the CET1 ratio up to around 18%, and further increases were associated with a decline.p.25
5. At the country level, a banking sector with an OCR of 8.5% had an efficiency score of around 0.69 against around 0.78 at an OCR of 10%.p.22
6. Approximately 10% of banks had a profit efficiency score of 0.5 or lower.p.18
7. Median profit efficiency reached its lowest point in 2020, falling to 0.61, likely reflecting the COVID-19 shock.p.18
8. Larger institutions, banks with higher asset quality and those with a more retail-oriented business model tend to have higher profit efficiency.p.7