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Two-way interplays between capital buffers, credit and output: evidence from French banks

  • Coffinet, J.
  • Coudert, V.
  • Pop, A.
  • Pouvelle, C.

We 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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Paper provided by Banque de France in its series Working papers with number 316.

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Length: 45 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bfr:banfra:316
Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/

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