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

Author

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

Abstract

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.

Suggested Citation

  • Coffinet, J. & Coudert, V. & Pop, A. & Pouvelle, C., 2011. "Two-way interplays between capital buffers, credit and output: evidence from French banks," Working papers 316, Banque de France.
  • Handle: RePEc:bfr:banfra:316
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    Cited by:

    1. Mohamed Trabelsi & Ibrahim Elbadawi & Dhuha Fadhel, 2015. "Bank's Capital Buffers and Business Cycle: Evidence from GCC Countries. 2004-2011," Working Papers 925, Economic Research Forum, revised Jul 2015.
    2. Cyril Pouvelle, 2012. "Bank Credit, Asset Prices and Financial Stability; Evidence From French Banks," IMF Working Papers 12/103, International Monetary Fund.

    More about this item

    Keywords

    Bank Capital Regulation; Procyclicality; Capital Buffers; Business Cycle Fluctuations; Basel III.;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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