IDEAS home Printed from https://ideas.repec.org/p/fip/fedcwq/150401.html
   My bibliography  Save this paper

How Cyclical Is Bank Capital?

Author

Listed:
  • Joseph G. Haubrich

Abstract

Using annual data since 1834 and quarterly data since 1959, I find a negative correlation between output and current and lagged values of the bank capital ratio, but a positive correlation with leading values, although except for the period since 1996 the numbers are mostly small and usually insignificant. The most significant correlations tend to reflect movements in bank assets, rather than capital itself, and although the pattern of aggregate correlations matches those of large banks, small banks show a different pattern, with strongly pro-cyclical capital ratios (counter-cyclical leverage).

Suggested Citation

  • Joseph G. Haubrich, 2015. "How Cyclical Is Bank Capital?," Working Papers 15-04R, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:150401
    DOI: 10.26509/frbc-wp-201504r1
    Note: This is a revision of Working Paper 15-04 originally published in March of 2015.
    as

    Download full text from publisher

    File URL: https://doi.org/10.26509/frbc-wp-201504r1
    File Function: Full text
    Download Restriction: no

    File URL: https://libkey.io/10.26509/frbc-wp-201504r1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Roger B. Myerson, 2014. "Rethinking the Principles of Bank Regulation: A Review of Admati and Hellwig's The Bankers' New Clothes," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 197-210, March.
    2. Charles Goodhart & Boris Hofmann & Miguel Segoviano, 2004. "Bank Regulation and Macroeconomic Fluctuations," Oxford Review of Economic Policy, Oxford University Press, vol. 20(4), pages 591-615, Winter.
    3. Alan Moreira & Alexi Savov, 2017. "The Macroeconomics of Shadow Banking," Journal of Finance, American Finance Association, vol. 72(6), pages 2381-2432, December.
    4. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
    5. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-770, April.
    6. Galo Nuño & Carlos Thomas, 2017. "Bank Leverage Cycles," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(2), pages 32-72, April.
    7. Estrella, Arturo, 2004. "The cyclical behavior of optimal bank capital," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1469-1498, June.
    8. Rafael Repullo & Javier Suarez, 2013. "The Procyclical Effects of Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 452-490.
    9. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    10. Ayuso, Juan & Perez, Daniel & Saurina, Jesus, 2004. "Are capital buffers pro-cyclical?: Evidence from Spanish panel data," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 249-264, April.
    11. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    12. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    13. Yuliy Sannikov & Markus Brunnermeier, 2012. "The I Theory of Money," 2012 Meeting Papers 411, Society for Economic Dynamics.
    14. Amir Amel-Zadeh & Mary E. Barth & Wayne R. Landsman, 2017. "The contribution of bank regulation and fair value accounting to procyclical leverage," Review of Accounting Studies, Springer, vol. 22(3), pages 1423-1454, September.
    15. Tobias Adrian & Hyun Song Shin, 2014. "Procyclical Leverage and Value-at-Risk," Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 373-403.
    16. Peter C. B. Phillips & Sainan Jin, 2021. "Business Cycles, Trend Elimination, And The Hp Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(2), pages 469-520, May.
    17. Mathias Drehmann & Kostas Tsatsaronis, 2014. "The credit-to-GDP gap and countercyclical capital buffers: questions and answers," BIS Quarterly Review, Bank for International Settlements, March.
    18. Richard S. Grossman, 2010. "Unsettled Account: The Evolution of Banking in the Industrialized World since 1800," Economics Books, Princeton University Press, edition 1, number 9219.
    19. Urban Jermann & Vincenzo Quadrini, 2012. "Macroeconomic Effects of Financial Shocks," American Economic Review, American Economic Association, vol. 102(1), pages 238-271, February.
    20. Begenau, Juliane, 2019. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," Research Papers 3554, Stanford University, Graduate School of Business.
    21. James D. Hamilton, 2018. "Why You Should Never Use the Hodrick-Prescott Filter," The Review of Economics and Statistics, MIT Press, vol. 100(5), pages 831-843, December.
    22. King, Robert G. & Rebelo, Sergio T., 1993. "Low frequency filtering and real business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 17(1-2), pages 207-231.
    23. Jacob A. Bikker & Paul A. J. Metzemakers, 2007. "Is Bank Capital Procyclical? A Cross-Country Analysis," Credit and Capital Markets, Credit and Capital Markets, vol. 40(2), pages 225-264.
    24. Esty, Benjamin C., 1998. "The impact of contingent liability on commercial bank risk taking," Journal of Financial Economics, Elsevier, vol. 47(2), pages 189-218, February.
    25. Amir Amel-Zadeh & Mary E. Barth & Wayne R. Landsman, 2017. "Erratum to: The contribution of bank regulation and fair value accounting to procyclical leverage," Review of Accounting Studies, Springer, vol. 22(3), pages 1455-1457, September.
    26. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 14(Spr), pages 3-18.
    27. Francisco Covas & Wouter J. Den Haan, 2011. "The Cyclical Behavior of Debt and Equity Finance," American Economic Review, American Economic Association, vol. 101(2), pages 877-899, April.
    28. Michael Brei & Leonardo Gambacorta, 2016. "Are bank capital ratios pro-cyclical? New evidence and perspectives," Economic Policy, CEPR;CES;MSH, vol. 31(86), pages 357-403.
    29. Michael Brei & Leonardo Gambacorta, 2014. "The leverage ratio over the cycle," BIS Working Papers 471, Bank for International Settlements.
    30. Allen N. Berger & Gregory F. Udell, 1993. "Did risk-based capital allocate bank credit and cause a credit crunch in the U.S.?," Finance and Economics Discussion Series 93-41, Board of Governors of the Federal Reserve System (U.S.).
    31. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-247, July-Sept.
    32. Urban Jermann & Vincenzo Quadrini, 2012. "Erratum: Macroeconomic Effects of Financial Shocks," American Economic Review, American Economic Association, vol. 102(2), pages 1186-1186, April.
    33. He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.
    34. Tetiana Davydiuk, 2017. "Dynamic Bank Capital Requirements," 2017 Meeting Papers 1328, Society for Economic Dynamics.
    35. Richard Ashley & Randal Verbrugge, 2009. "Frequency Dependence in Regression Model Coefficients: An Alternative Approach for Modeling Nonlinear Dynamic Relationships in Time Series," Econometric Reviews, Taylor & Francis Journals, vol. 28(1-3), pages 4-20.
    36. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    37. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, volume 1, number 9929.
    38. Mark J. Flannery & Kasturi P. Rangan, 2008. "What Caused the Bank Capital Build-up of the 1990s?," Review of Finance, European Finance Association, vol. 12(2), pages 391-429.
    39. Christian Laux & Thomas Rauter, 2017. "Procyclicality of U.S. Bank Leverage," Journal of Accounting Research, Wiley Blackwell, vol. 55(2), pages 237-273, May.
    40. den Haan, Wouter J., 2000. "The comovement between output and prices," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 3-30, August.
    41. Robert M. de Jong & Neslihan Sakarya, 2016. "The Econometrics of the Hodrick-Prescott Filter," The Review of Economics and Statistics, MIT Press, vol. 98(2), pages 310-317, May.
    42. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
    43. Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
    44. Esa Jokivuolle & Ilkka Kiema & Timo Vesala, 2014. "Why Do We Need Countercyclical Capital Requirements?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 46(1), pages 55-76, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. PJ Elliott, 2021. "Banking Trends: How and Why Bank Capital Ratios Change Over the Business Cycle," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 6(1), pages 17-22, March.
    2. Václav Brož & Lukáš Pfeifer, 2021. "Are risk weights of banks in the Czech Republic procyclical? Evidence from wavelet analysis," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 113-139.
    3. Wenli Li, 2021. "The Graying of Household Debt in the U.S," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 6(1), pages 2-7, March.
    4. PJ Elliott, 2021. "Banking Trends: How and Why Bank Capital Ratios Change Over the Business Cycle," Banking Trends, Federal Reserve Bank of Philadelphia, March.
    5. Ryan Michaels, 2021. "Isolating the Effect of State Business Closure Orders on Employment," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 6(1), pages 8-16, March.
    6. Phurichai Rungcharoenkitkul & Claudio Borio & Piti Disyatat Author-X-Name_First: Piti, 2019. "Monetary policy hysteresis and the financial cycle," BIS Working Papers 817, Bank for International Settlements.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    2. Montagnoli, Alberto & Mouratidis, Konstantinos & Whyte, Kemar, 2021. "Assessing the cyclical behaviour of bank capital buffers in a finance-augmented macro-economy," Journal of International Money and Finance, Elsevier, vol. 110(C).
    3. de-Ramon, Sebastian J.A. & Francis, William B. & Harris, Qun, 2022. "Bank-specific capital requirements and capital management from 1989-2013: Further evidence from the UK," Journal of Banking & Finance, Elsevier, vol. 138(C).
    4. Jondeau, Eric & Sahuc, Jean-Guillaume, 2022. "Bank capital shortfall in the euro area," Journal of Financial Stability, Elsevier, vol. 62(C).
    5. David Martinez-Miera & Rafael Repullo, 2019. "Monetary Policy, Macroprudential Policy, and Financial Stability," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 809-832, August.
    6. E. Jondeau & J-G. Sahuc, 2018. "A General Equilibrium Appraisal of Capital Shortfall," Working papers 668, Banque de France.
    7. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi, December.
    8. Athanasoglou, Panayiotis P. & Daniilidis, Ioannis & Delis, Manthos D., 2014. "Bank procyclicality and output: Issues and policies," Journal of Economics and Business, Elsevier, vol. 72(C), pages 58-83.
    9. Kok, Christoffer & Gross, Marco & Żochowski, Dawid, 2016. "The impact of bank capital on economic activity - evidence from a mixed-cross-section GVAR model," Working Paper Series 1888, European Central Bank.
    10. Melina Dritsaki & Chaido Dritsaki, 2022. "Comparison of HP Filter and the Hamilton’s Regression," Mathematics, MDPI, vol. 10(8), pages 1-18, April.
    11. Ugo Panizza, 2022. "Do Countries Default in Bad Times? The Role of Alternative Detrending Techniques," IHEID Working Papers 06-2022, Economics Section, The Graduate Institute of International Studies.
    12. McInerney, Niall, 2019. "Macroprudential Policy, Banking and the Real Estate Sector," MPRA Paper 91777, University Library of Munich, Germany.
    13. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    14. Markus Behn & Rainer Haselmann & Paul Wachtel, 2016. "Procyclical Capital Regulation and Lending," Journal of Finance, American Finance Association, vol. 71(2), pages 919-956, April.
    15. Neslihan Sakarya & Robert M. de Jong, 2022. "The spectral analysis of the Hodrick–Prescott filter," Journal of Time Series Analysis, Wiley Blackwell, vol. 43(3), pages 479-489, May.
    16. Lenel, Moritz & Piazzesi, Monika & Schneider, Martin, 2019. "The short rate disconnect in a monetary economy," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 59-77.
    17. Viv B. Hall & Peter Thomson, 2022. "A boosted HP filter for business cycle analysis:evidence from New Zealand's small open economy," CAMA Working Papers 2022-45, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    18. Schüler, Yves S. & Hiebert, Paul P. & Peltonen, Tuomas A., 2020. "Financial cycles: Characterisation and real-time measurement," Journal of International Money and Finance, Elsevier, vol. 100(C).
    19. Khurram Iftikhar & Syed Faizan Iftikhar, 2018. "The impact of business cycle on capital buffer during the period of Basel-II and Basel-III: Evidence from the Pakistani banks," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 1-20, December.
    20. Viv B. Hall & Peter Thomson, 2021. "Does Hamilton’s OLS Regression Provide a “better alternative” to the Hodrick-Prescott Filter? A New Zealand Business Cycle Perspective," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 17(2), pages 151-183, November.

    More about this item

    Keywords

    Bank capital; business cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedcwq:150401. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: 4D Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbclus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.