The Determinants of Capital Buffers in CEECs
Banking capital ratios show a steadily decline in almost Central and Eastern European Countries (CEECs) since 2001, despite unchanged capital adequacy rules. Using a dynamic panel-analysis based on country-level data for CEECs, we empirically assess the determinants of capital buffers. Main results are as follows. First, there are large and significant adjustment costs in raising capital. Second, banks behave pro-cyclically, depleting their buffers in upturns to benefit from unanticipated investment opportunities. Third, there is a significant negative relationship between current levels of non-performing loans (NPLs) and capital buffers, suggesting that banks in CEECs are risk-takers. Banking sectors with large past NPLs however tend to have larger buffers. Finally, the access to external capital may appear still somewhat limited, with banks relying on internally generated funds to raise buffers.
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