Bank valuation rises with capital buffers, risk channel dominates
A De Nederlandsche Bank (DNB) working paper finds that unexpected increases in macroprudential capital buffers lead to a short-run decline in bank price-to-book ratios, followed by a sustained increase. This suggests the risk channel, not the payout channel, dominates bank valuation.
The buffer paradox
A study by Eric Cuijpers at De Nederlandsche Bank (DNB) investigates how unexpected changes in macroprudential capital buffer requirements impact bank valuation, measured by price-to-book (PtB) ratios.
Using market reactions to buffer announcements and panel local projections, the analysis of large European banks reveals a short-run decline in PtB ratios immediately after an unexpected buffer increase.
This initial dip is, however, followed by a sustained increase in the weeks following the announcement.
This finding challenges the industry narrative that higher capital requirements depress bank valuations.
The research suggests that the market recognizes reduced risk, which outweighs the potential for lower distributable resources, indicating the risk channel's dominance over the payout channel in valuing large European banks.
Unpacking the valuation puzzle
The paper addresses a long-standing debate on whether macroprudential capital buffer requirements depress bank valuations, especially in Europe where price-to-book ratios have been consistently lower than in other regions since the Global Financial Crisis.
Industry voices often contend that higher capital requirements mechanically reduce return on equity and thus valuation.
Previous literature has struggled to isolate the causal effect of buffer policy from endogenous macro-financial and banking conditions.
This study contributes by constructing market-based buffer 'surprises' that are plausibly exogenous, allowing for a clearer identification of the policy's true impact on bank valuation.
A welcome empirical counter
This research offers a crucial empirical counter to the industry narrative that capital buffers depress bank valuations.
By isolating exogenous policy shocks, it provides a nuanced understanding of how markets price regulatory changes.
The findings underscore the risk reduction channel, suggesting robust capital frameworks ultimately bolster investor confidence.