The Basel II framework allows banks to use either standard or advanced approaches for calculating regulatory capital. Differing from the standard approach, advanced approaches are built upon banks’ own estimated risk parameters. In this study, we examine three questions: What are the factors driving banks to apply advanced approaches? Do banks underestimate risk weighted assets (RWAs) by using advanced approaches? Do investors react differently to the RWAs reported under the two different approaches? Using a sample of European listed banks from 2005 to 2015, we find that beyond country-level specification, the heterogeneity of loans, trading activities and solvency are firm-level factors explaining banks’ RWA reporting choice; however, the relationships vary across credit risk, market risk and operational risk. Consistent with regulatory capital arbitrage, our results suggest that weakly capitalized banks report lower RWAs than well-capitalized banks, regardless of the approach used to compute RWAs. In response to the third question, we provide evidence showing that the credit market reacts significantly to changes in RWAs reported under advanced approaches but not under standard approaches.