As part of the Brown Bag Lunch series, the International Economics Department at the Graduate Institute is pleased to invite you to a public talk given by Aakriti Mathur, PhD student in International Economics. She will present her research work entitled
In the dangerzone! Regulatory uncertainty and voluntary bank capital surpluses, coauthored with Peter Eckley (Bank of England) and William Francis (Bank of England).

Abstract: Banks voluntarily hold substantially more capital than required by regulators. Understanding why is important for forecasting the extent to which banks would use this surplus to support lending in a crisis, and for calibrating macro-prudential policy. This paper studies the role of uncertainty about the regulations themselves, which could heighten any precautionary motive to avoid accidental breach of minimum requirements. We introduce two new measures of regulatory uncertainty: one at bank level based on confidential regulatory data; another at sector-level based on news-media text. These correlate with more general uncertainty measures from the literature, but also contain distinct information. Using regulatory data on UK banks between 1989-2013, we find that a one standard deviation increase in regulatory uncertainty increases banks’ voluntary capital surpluses by 0.8 to 2 percentage points on average, and this effect is stronger when surpluses are smaller, that is, for banks in the “dangerzone”. Given a Basel I minimum capital requirement of 8%, our results are economically meaningful.