Analyzing Risk Exposure Determinants in European Banking: A Regulatory Perspective

Arnone, Massimo and Costantiello, Alberto and Leogrande, Angelo (2025): Analyzing Risk Exposure Determinants in European Banking: A Regulatory Perspective.

Abstract

The paper deals only with the identification of the determinants of total risk exposure amount within the European banking system, while the importance of TREA within Basel III regulatory regimes is focused. The research provides the integration of an econometric investigation with high-end machine learning techniques for the identification of the influential financial variables of TREA. The most relevant financial determinants of TREA were identified as LCR, CRWEA, LA, and OREA. These also reflect complex interdependencies-for instance, the negative value of TREA and LCR would suggest that there were trade-offs made between risk-taking and liquidity management. Thus, the positive relationship with CRWEA, and even more so with derivatives over assets, underlines intrinsic risks from credit exposures and related to financial instruments' complexity. The report further iterates that there should be mechanisms for appropriate risk-weighting, adequate liquidity buffers, and proper operational controls so that the financial system can become significantly more stable and resilient. This work will put forward actionable recommendations to policy makers, regulators, and financial institutions on mitigating systemic vulnerabilities and further optimizing their strategies for compliance in view of an increasingly volatile financial landscape, leveraging from traditional econometric modeling insights with machine learning.

• Item Type: MPRA Paper
• Language: English
• Keywords: Total Risk Exposure Amount, European Banking System, Liquidity Coverage Ratio, Risk Management, Basel III Compliance.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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