Changes to Bank Capital Ratios and Their Drivers Prior and During <scp>COVID</scp> ‐19 Pandemic: Evidence From the European Union

ABSTRACT This article contributes to the literature on banks' strategies for increasing capital requirements in the period of 2017–2021. We analysed a sample of 85 European banks and distinguished between subgroups according to bank size, capitalisation, and riskiness. We examined their responses to higher capital requirements following the issuance of the finalised Basel III reforms and increased regulatory and supervisory scrutiny following the COVID‐19 outbreak. We found evidence that banks' adjustments towards higher capital ratios were more pronounced and faster in the COVID‐19 period and that they depended on banks' specific characteristics and positions. Observed differences between banks and periods were mainly due to the different treatment of risk in banks' books. In particular, higher capitalisation and a lower risk profile allowed banks to take on the risk regardless of the period, while banks with higher risk tended to shift to less risky assets to manage their capital ratios.