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Risk, capital buffer and bank lending: a granular approach to the adjustment of euro area banks

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    Abstract

    We develop a partial adjustment model in order to estimate the factors contributing to banks’ internal target capital ratio, lending policy and holding of securities. The model is estimated on a panel of listed euro area banks and country specific macrovariables. Firstly, banks’ internal target capital ratios are estimated by using information on banks’ riskiness and earnings capacity. Secondly, the impact of banks’ capital gap on the credit supply and the security portfolio is estimated while controlling for the macroeconomic environment. An increase in bank’ balance sheet risk is shown to increase the target capital ratios. The adjustment towards higher equilibrium capital ratios has a significant impact on banks’ assets. The impact is found to be more sizeable on security holdings than on loans, thereby suggesting a pecking order. JEL Classification: G21

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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1499.pdf
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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 1499.

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    Length: 28 pages
    Date of creation: Nov 2012
    Date of revision:
    Handle: RePEc:ecb:ecbwps:20121499

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    Keywords: Banks; euro area; capital ratios; credit supply; partial adjustment model;

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