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Is bank capital procyclical? A cross-country analysis

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  • Jaap Bikker
  • Paul Metzemakers

Abstract

This paper investigates the determinants of commercial banks' own internal capital targets and potential sensitivity of these levels to the business cycle . World-wide results make clear that banks' own risk is only slightly dependent on the business cycle. Banks tend to hold substantial capital buffers on top of minimum requirements, reflecting that they hold capital for other reasons than strictly meeting the capital requirements. These results suggest that actual capital levels may not become substantially more procyclical under the new risk-sensitive Basel II regime. However, a number of banks, especially smaller ones, combine a relatively risky portfolio with limited buffer capital. A more risk-sensitive capital regulation regime could force these banks to obtain higher capital levels, which would make them more procyclical.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 009.

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Date of creation: Sep 2004
Date of revision:
Handle: RePEc:dnb:dnbwpp:009

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Keywords: Basel II; BIS capital ratio; bank's own capital targets; credit crunch; business cycle;

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References

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Citations

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Cited by:
  1. Agenor, Pierre-Richard & Pereira da Silva, Luiz A., 2009. "Cyclical effects of bank capital requirements with imperfect credit markets," Policy Research Working Paper Series 5067, The World Bank.
  2. Darracq Pariès, Matthieu & Kok, Christoffer & Rodriguez-Palenzuela, Diego, 2010. "Macroeconomic propagation under different regulatory regimes: Evidence from an estimated DSGE model for the euro area," Working Paper Series 1251, European Central Bank.
  3. Francesco D'Arack & Sandrine Levasseur, 2007. "The Determinants of Capital Buffers in CEECs," Sciences Po publications N°2007-28, Sciences Po.
  4. Memmel, Christoph & Raupach, Peter, 2010. "How do banks adjust their capital ratios?," Journal of Financial Intermediation, Elsevier, vol. 19(4), pages 509-528, October.
  5. Jokipii, Terhi & Milne, Alistair, 2007. "The Cyclical Behaviour of European Bank Capital Buffers," SIFR Research Report Series 56, Institute for Financial Research.
  6. Andersen, Henrik, 2011. "Procyclical implications of Basel II: Can the cyclicality of capital requirements be contained?," Journal of Financial Stability, Elsevier, vol. 7(3), pages 138-154, August.
  7. Repullo, Rafael & Suarez, Javier, 2008. "The Procyclical Effects of Basel II," CEPR Discussion Papers 6862, C.E.P.R. Discussion Papers.
  8. Jokivuolle , Esa & Peura , Samu, 2006. "Rating targeting and the confidence levels implicit in bank capital," Research Discussion Papers 27/2006, Bank of Finland.
  9. Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
  10. Isabelle Distinguin & Caroline Roulet & Amine Tarazi, 2012. "Bank regulatory Capital Buffer and Liquidity: Evidence from US and European Publicly Traded Banks," Working Papers hal-00918468, HAL.
  11. Coffinet, Jérôme & Coudert, Virginie & Pop, Adrian & Pouvelle, Cyril, 2012. "Two-way interplays between capital buffers and credit growth: Evidence from French banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1110-1125.
  12. Haibin Zhu, 2008. "Capital Regulation and Banks' Financial Decisions," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 165-211, March.
  13. A. R. Fonseca & F. González & L. Pereira da Silva, 2010. "Cyclical Effects of Bank Capital Buffers with Imperfect Credit Markets: international evidence," Working Papers Series 216, Central Bank of Brazil, Research Department.
  14. Haibin Zhu, 2007. "Capital regulation and banks' financial decisions," BIS Working Papers 232, Bank for International Settlements.
  15. Etienne Bordeleau & Allan Crawford & Christopher Graham, 2009. "Regulatory Constraints on Bank Leverage: Issues and Lessons from the Canadian Experience," Discussion Papers 09-15, Bank of Canada.
  16. Distinguin, Isabelle & Roulet, Caroline & Tarazi, Amine, 2013. "Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3295-3317.

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