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February 21 - Giovanni Ferri (LUMSA and CASMEF)

Giovanni Ferri (LUMSA and CASMEF) will present in meeting room A409 at 13 about "IRB Model Regulatory Arbitrage and Profitability at European Banks".


Risk Weighted Assets (RWAs) dispersion across similar banks evokes regulatory arbitrage via IRB models maneuvering. Focusing on profitability distortions, we use yearly data assembled for 239 European banks over 2007-2013. We show that a significant link between lower RWAs and higher RoE emerges only for the banks employing IRB models more intensely. Moreover, splitting RWAs into a systematic component depending on the assets share a bank has shifted to IRB and its orthogonal component we find that only the latter affects RoE levels. Thus, we conclude that regulatory arbitrage via IRB model calibration significantly affects reported profits at European banks.

JEL Classif codes: G2; G21; G28. Keywords: Banking; Regulatory arbitrage; Profitability; Risk Weighted Assets dispersion; IRB.