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Is bank capital procyclical? A cross-country analysis

  • Jaap Bikker
  • Paul Metzemakers

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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File URL: http://www.dnb.nl/binaries/Working%20Paper%20No%209-2004_tcm46-146666.pdf
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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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Web page: http://www.dnb.nl/en/
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  1. J.A. Bikker & H. Hu, 2003. "Cyclical Patterns in Profits, Provisioning and Lending of Banks," DNB Staff Reports (discontinued) 86, Netherlands Central Bank.
  2. Allen N. Berger & Richard J. Herring & Giorgio P. Szego, 1995. "The role of capital in financial institutions," Finance and Economics Discussion Series 95-23, Board of Governors of the Federal Reserve System (U.S.).
  3. Laeven, Luc & Majnoni, Giovanni, 2001. "Loan loss provisioning and economic slowdowns : too much, too late?," Policy Research Working Paper Series 2749, The World Bank.
  4. Peura, Samu & Jokivuolle, Esa, 2004. "Simulation based stress tests of banks' regulatory capital adequacy," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1801-1824, August.
  5. 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.
  6. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P. Tsomocos, 2002. "Procyclicality and the New Basel Accord: banks' choice of loan rating system," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  7. 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.
  8. Hall, B.J., 1993. "How Has the Basle Accord Affected Bank Portfolios?," Harvard Institute of Economic Research Working Papers 1642, Harvard - Institute of Economic Research.
  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. C. H. Furfine, 2000. "Evidence on the response of US banks to changes in capital requirements," BIS Working Papers 88, Bank for International Settlements.
  11. Allen N. Berger & Gregory F. Udell, 1994. "Did risk-based capital allocate bank credit and cause a "credit crunch" in the United States?," Proceedings, Federal Reserve Bank of Cleveland, pages 585-633.
  12. 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.
  13. Patricia Jackson & William Perraudin & Victoria Saporta, 2002. "Regulatory and 'economic' solvency standards for internationally active banks," Bank of England working papers 161, Bank of England.
  14. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
  15. Jacob A. Bikker & Haixia Hu, 2002. "Cyclical patterns in profits, provisioning and lending of banks and procyclicality of the new Basel capital requirements," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 55(221), pages 143-175.
  16. Tolga Ediz & Ian Michael & William Perraudin, 1998. "The impact of capital requirements on U.K. bank behaviour," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 15-22.
  17. Steven A. Sharpe, 1995. "Bank capitalization, regulation, and the credit crunch: a critical review of the research findings," Finance and Economics Discussion Series 95-20, Board of Governors of the Federal Reserve System (U.S.).
  18. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  19. 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.
  20. Estrella, Arturo, 2004. "The cyclical behavior of optimal bank capital," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1469-1498, June.
  21. 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.
  22. Philip Turner, 2000. "Procyclicality of Regulatory Ratios?," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization. 2000-01, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
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