SDG 8: Decent Work & Economic Growth | SDG 16: Peace, Justice & Strong Institutions
Institutions: Reserve Bank of India | Ministry of Finance
The European Central Bank’s working paper (2025) examines how banks adjust when capital requirements-rules forcing them to hold more equity-are increased. It finds that banks often cut their voluntary buffers (extra capital held above the minimum) rather than issuing new shares, especially those with weaker balance sheets and higher bad loans.
By focusing on the liability side of bank balance sheets (i.e. how they raise capital), this paper reveals that regulation aimed at strengthening resilience may be only partly effective-because banks absorb the burden by using what they already have. The effect is stronger in banks with poor asset quality (higher non-performing loans).
In India, where many banks and NBFCs already operate under tight capital constraints, this finding warns that simply raising required capital might not translate into stronger resilience. Regulators like RBI and SEBI may need rules that ensure absolute equity increases or limit buffer erosion.
What is a Voluntary Buffer? → The extra capital a bank holds beyond the regulatory minimum, used as a safety margin against losses.
What is Capital Requirement? → The regulatory standard for how much equity a bank must maintain relative to its risk-weighted assets—higher requirements force banks to be more “skin in the game.”
Follow the full paper here: https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp3128~e95071d333.en.pdf