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Banks’ buffer capital: How important is risk?

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Author Info
Kjersti-Gro Lindquist (Norges Bank)
Abstract

Most banks hold a capital to asset ratio well above the required minimum defined by the present capital adequacy regulation (Basel I). Using bank-level panel data from Norway, important hypotheses concerning the determination of the buffer capital are analysed. Focus is on the importance of: (i) risk, particularly credit risk, (ii) the buffer as an insurance, (iii) the competition effect, (iv) supervisory discipline, and (v) economic growth. A negative or nonsignificant risk effect is found, which suggests that introducing a more risk-sensitive capital regulation (Basel II) is likely to affect Norwegian banks. Support is found for the hypothesis that buffer capital serves as an insurance against failure to meet the capital requirements.

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Paper provided by Norges Bank in its series Working Paper with number 2003/11.

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Length: 31 pages
Date of creation: 15 Dec 2003
Date of revision:
Handle: RePEc:bno:worpap:2003_11

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Related research
Keywords: Banking; Excess capital; Risk; Panel data;

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  5. Craig Furfine, 2001. "Bank Portfolio Allocation: The Impact of Capital Requirements, Regulatory Monitoring, and Economic Conditions," Journal of Financial Services Research, Springer, vol. 20(1), pages 33-56, September. [Downloadable!] (restricted)
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  9. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December. [Downloadable!] (restricted)
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