Two-way interplays between capital buffers, credit and output: evidence from French banks
AbstractWe assess the extent to which capital buffers (the capital banks hold in excess of the regulatory minimum) exacerbate rather than reduce the cyclical behavior of credit. We empirically study the relationships between output gap, capital buffers and loan growth with firm-level data for French banks over the period 1993—2009. Our findings reveal that bank capital buffers intensify the cyclical credit fluctuations arising from the output gap developments, all the more as better quality capital is considered. Moreover, by performing Granger causality tests at the bank level, we find evidence of a two-way causality between capital buffers and loan growth, pointing to mutually reinforcing mechanisms. Overall, those empirical results lend support to a countercyclical financial regulation that focuses on highest-quality capital and aims at smoothing loan growth.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 316.
Length: 45 pages
Date of creation: 2011
Date of revision:
Bank Capital Regulation; Procyclicality; Capital Buffers; Business Cycle Fluctuations; Basel III.;
Find related papers by JEL classification:
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-BAN-2011-02-26 (Banking)
- NEP-EFF-2011-02-26 (Efficiency & Productivity)
- NEP-MIC-2011-02-26 (Microeconomics)
- NEP-REG-2011-02-26 (Regulation)
- NEP-RMG-2011-02-26 (Risk Management)
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- Cyril Pouvelle, 2012. "Bank Credit, Asset Prices and Financial Stability," IMF Working Papers 12/103, International Monetary Fund.
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