Why Do the Minimum Capital Adequacy Ratios Vary Across Europe?
Why Do the Minimum Capital Adequacy Ratios Vary Across Europe?

Summary/Abstract: In the paper we seek an explanation of disparities in the required minimum levels of the capital adequacy ratio. Attention is given to 40 European countries mainly in the pre-crisis period. Cluster analysis results justify a need for a discretionary approach of the national prudential authorities when adopting the supranational prudential recommendations, to be more precise, Basel Committee conclusions. In such a manner, lower regulatory burden, i.e. lower minimum level of capital adequacy ratio in this case, is and should remain a privilege of the more transparent, ethical and accountable economic systems with better country credit rating, higher GDP per capita and lower inflation rate. Despite insignificance of the banking sector variables in the cluster analysis, when linear regression method is adopted, variables such as bank concentration indicator and asset quality have the highest explanatory power. A conclusion can be made that the set-up of the minimum capital adequacy ratio should be carefully planned due to threats of loss in the economic output if the banking sector is over-regulated or on the other hand increased financial instability in case of being under-regulated.10

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