The Capital Buffer Calibration for Other Systemically Important Institutions – Is There Too Much Country Heterogeneity in the EU?
Since the 2007--2008 financial crisis, identifying systemically important financial institutions is a key topic in financial regulation. 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 crucially does not go as far as specifying an assignment process of scores into buffers. In this study, we model this assignment process as a Nash bargaining problem between the regulator and the banks' representatives. Based on 186 European union banks that are classified as OSIIs, we derive the variables that influence the bargaining solution and estimate their coefficients. We also quantify the extent of country heterogeneity in the buffer assignment, which accounts to around 83 bn EUR in additional capital requirements