Max headroom: Discretionary capital buffers and bank risk

This paper examines the association between discretionary capital buffers, requirements, and risk for 99 largest European banks from 2013 to 2020. Discretionary buffers are banks’ own or headroom: difference reported required capital. Against backdrop of steadily increasing requirements over sample period, I exploit unique detailed Pillar 2 data that disclose since release a 2015 Banking Authority opinion. show less headroom is associated with increased bank risk, even well-capitalized banks. An additional examination responses 2016 2018 EBA stress tests reveals supervised by ECB struggled improve headroom. Overall, document limitations effectiveness requirements.