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The Determinants of Capital Buffers in CEECs

  • Francesco d’Avack
  • Sandrine Levasseur

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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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2007-28.

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Date of creation: 2007
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Handle: RePEc:fce:doctra:0728
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  1. Allen N. Berger, 1994. "The relationship between capital and earnings in banking," Finance and Economics Discussion Series 94-2, Board of Governors of the Federal Reserve System (U.S.).
  2. World Bank, 2002. "Transition, The First Ten Years : Analysis and Lessons for Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 14042.
  3. Jaap Bikker & Paul Metzemakers, 2004. "Is bank capital procyclical? A cross-country analysis," DNB Working Papers 009, Netherlands Central Bank, Research Department.
  4. G.J. de Bondt & H.M. Prast, 1999. "Bank capital ratios in the 1990s: cross-country evidence," WO Research Memoranda (discontinued) 603, Netherlands Central Bank, Research Department.
  5. Larry D. Wall & David R. Peterson, 1994. "Bank holding company capital targets in the early 1990s: the regulators versus the markets," Working Paper 94-11, Federal Reserve Bank of Atlanta.
  6. C. H. Furfine, 2000. "Evidence on the response of US banks to changes in capital requirements," BIS Working Papers 88, Bank for International Settlements.
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