Capital Buffer Assignments to Other Systemically Important Institutions in the Euro area – Is the Country Heterogeneity in the EU caused by Regulatory Capture?

In this note, we discuss how the too-big-to-fail dilemma for large financial institution is addressed in the regulatory framework and how (differently) regulators in the EU apply it. The European Banking Authority (EBA) has devised a buffer guideline for identifying other systemically important institutions (OSIIs) to address this issue. This guideline defines how to identify OSIIs by a scoring process but does not specify how to map these scores into additional capital buffers. In this study, we empirically show that the OSII buffer assignment is very heterogeneous in Europe. Based on all EU banks that are classified as OSIIs between 2015 and 2018, we show that the OSII score has less impact on the OSII buffer than the headquarter country dummy of the bank after controlling for other important bank specific variables. We also quantify the extent of country heterogeneity in the buffer assignment, which would increase additional capital requirements in the euro area by 90 bn EUR. Finally, we discuss if our results could be partially explained by regulatory capture.