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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
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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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  1. Bikker, J.A. & Metzemakers, P.A.J., 2005. "Bank provisioning behaviour and procyclicality," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(2), pages 141-157, April.
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  9. Jacques, Kevin & Nigro, Peter, 1997. "Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach," Journal of Economics and Business, Elsevier, vol. 49(6), pages 533-547.
  10. J.A. Bikker & Haixia Hu, 2001. "Cyclical patterns in profits provisioning and lending of banks and procyclicality of the new basel capital requirements," Research Series Supervision (discontinued) 39, Netherlands Central Bank, Directorate Supervision.
  11. J.A. Bikker & H. Hu, 2003. "Cyclical Patterns in Profits, Provisioning and Lending of Banks," DNB Staff Reports (discontinued) 86, Netherlands Central Bank.
  12. Reinhart, Carmen & Levich, Richard & Majoni, Giovanni, 2002. "Ratings, rating agencies and the global financial system: Summary and policy implications," MPRA Paper 13249, University Library of Munich, Germany.
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  14. Jackson, Patricia & Perraudin, William & Saporta, Victoria, 2002. "Regulatory and "economic" solvency standards for internationally active banks," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 953-976, May.
  15. C. H. Furfine, 2000. "Evidence on the response of US banks to changes in capital requirements," BIS Working Papers 88, Bank for International Settlements.
  16. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
  17. Calem, Paul & Rob, Rafael, 1999. "The Impact of Capital-Based Regulation on Bank Risk-Taking," Journal of Financial Intermediation, Elsevier, vol. 8(4), pages 317-352, October.
  18. Hall Brian J., 1993. "How Has the Basle Accord Affected Bank Portfolios?," Journal of the Japanese and International Economies, Elsevier, vol. 7(4), pages 408-440, December.
  19. Robert T. Clair, 1992. "Loan growth and loan quality: some preliminary evidence from Texas banks," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 9-22.
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Citations

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Cited by:
  1. 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.
  2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2011. "Cyclical Effects of Bank Capital Requirements with Imperfect Credit Markets," Working Papers Series 234, Central Bank of Brazil, Research Department.
  3. Repullo, Rafael & Suarez, Javier, 2008. "The Procyclical Effects of Basel II," CEPR Discussion Papers 6862, C.E.P.R. Discussion Papers.
  4. 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.
  5. 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.
  6. Jokipii, Terhi & Milne , Alistair, 2006. "The cyclical behaviour of European bank capital buffers," Research Discussion Papers 17/2006, Bank of Finland.
  7. 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.
  8. Haibin Zhu, 2007. "Capital regulation and banks' financial decisions," BIS Working Papers 232, Bank for International Settlements.
  9. 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.
  10. 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.
  11. Francesco D'Arack & Sandrine Levasseur, 2007. "The Determinants of Capital Buffers in CEECs," Sciences Po publications N°2007-28, Sciences Po.
  12. 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.
  13. Memmel, Christoph & Raupach, Peter, 2010. "How do banks adjust their capital ratios?," Journal of Financial Intermediation, Elsevier, vol. 19(4), pages 509-528, October.
  14. Heid, Frank, 2007. "The cyclical effects of the Basel II capital requirements," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3885-3900, December.
  15. 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.
  16. Jokivuolle , Esa & Peura , Samu, 2006. "Rating targeting and the confidence levels implicit in bank capital," Research Discussion Papers 27/2006, Bank of Finland.

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