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Are bank capital ratios pro-cyclical? New evidence and perspectives

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  • Michael Brei
  • Leonardo Gambacorta

Abstract

This paper analyses how the new Basel III leverage ratio and risk-weighted regulatory capital ratio behave over the cycle. The analysis proposes a set-up to test for the cyclical properties of bank capital ratios, taking into account structural shifts in banks’ behaviour during the global financial crisis and its aftermath. Using a large data set covering international banks headquartered in 14 advanced economies for the period 1994–2012, we find that the Basel III leverage ratio is significantly more countercyclical than the risk-weighted regulatory capital ratio: it is a tighter constraint for banks in booms and a looser constraint in recessions.

Suggested Citation

  • Michael Brei & Leonardo Gambacorta, 2016. "Are bank capital ratios pro-cyclical? New evidence and perspectives," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(86), pages 357-403.
    • Handle: RePEc:oup:ecpoli:v:31:y:2016:i:86:p:357-403.
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    File URL: http://hdl.handle.net/10.1093/epolic/eiw001
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