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Are bank capital ratios pro-cyclical? New evidence and perspectives

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  • Michael Brei

    () (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Leonardo Gambacorta

Abstract

This paper analyses how the new Basel III leverage ratio and risk-weighted regulatory capital ratio behave over the cycle. The analysis proposes a set-up to test for the cyclical properties of bank capital ratios, taking into account structural shifts in banks’ behaviour during the global financial crisis and its aftermath. Using a large data set covering international banks headquartered in 14 advanced economies for the period 1994–2012, we find that the Basel III leverage ratio is significantly more countercyclical than the risk-weighted regulatory capital ratio: it is a tighter constraint for banks in booms and a looser constraint in recessions.
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Suggested Citation

  • Michael Brei & Leonardo Gambacorta, 2016. "Are bank capital ratios pro-cyclical? New evidence and perspectives," Post-Print hal-01410653, HAL.
  • Handle: RePEc:hal:journl:hal-01410653
    Note: View the original document on HAL open archive server: https://hal-univ-paris10.archives-ouvertes.fr/hal-01410653
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    Cited by:

    1. McInerney, Niall, 2019. "Macroprudential Policy, Banking and the Real Estate Sector," MPRA Paper 91777, University Library of Munich, Germany.
    2. Philippon, Thomas, 2016. "The FinTech Opportunity," CEPR Discussion Papers 11409, C.E.P.R. Discussion Papers.
    3. Xi Yang, 2016. "Predicting bank failures: The leverage versus the risk-weighted capital ratio," EconomiX Working Papers 2016-15, University of Paris Nanterre, EconomiX.
    4. Birchwood, Anthony & Brei, Michael & Noel, Dorian M., 2017. "Interest margins and bank regulation in Central America and the Caribbean," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 56-68.
    5. Arnould, Guillaume & Dehmej, Salim, 2016. "Is the European banking system robust? An evaluation through the lens of the ECB׳s Comprehensive Assessment," International Economics, Elsevier, vol. 147(C), pages 126-144.
    6. M. Brei & L. Jacolin & A. Noah, 2018. "Credit risk and bank competition in Sub-Saharan Africa," Working papers 664, Banque de France.
    7. repec:eee:jmacro:v:54:y:2017:i:pb:p:217-231 is not listed on IDEAS
    8. Leonardo Gambacorta & Sudipto Karmakar, 2018. "Leverage and Risk-Weighted Capital Requirements," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 153-191, December.
    9. Tatiana Gaelle Yongoua Tchikanda, 2017. "Systemic risk and individual risk: A trade-off?," EconomiX Working Papers 2017-16, University of Paris Nanterre, EconomiX.
    10. repec:eee:finsta:v:33:y:2017:i:c:p:331-345 is not listed on IDEAS
    11. Alberto Montagnoli & Konstantinos Mouratidis & Kemar Whyte, 2018. "Assessing the Cyclical Behaviour of Bank Capital Buyers in a Finance-Augmented Macro-Economy," Working Papers 2018003, The University of Sheffield, Department of Economics.
    12. repec:kap:annfin:v:14:y:2018:i:1:d:10.1007_s10436-017-0310-3 is not listed on IDEAS
    13. Claessens, Stijn, 2017. "Regulation and structural change in financial systems," CEPR Discussion Papers 11822, C.E.P.R. Discussion Papers.
    14. Raphael Auer & Steven Ongena, 2016. "The countercyclical capital buffer and the composition of bank lending," BIS Working Papers 593, Bank for International Settlements.
    15. repec:prg:jnlefa:v:2018:y:2018:i:4:id:216:p:05-24 is not listed on IDEAS
    16. Smith, Jonathan Acosta & Grill, Michael & Lang, Jan Hannes, 2017. "The leverage ratio, risk-taking and bank stability," Working Paper Series 2079, European Central Bank.
    17. Avdjiev, Stefan & Aysun, Uluc & Hepp, Ralf, 2019. "What drives local lending by global banks?," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 54-75.
    18. Vaclav Broz & Lukas Pfeifer & Dominika Kolcunova, 2017. "Are the Risk Weights of Banks in the Czech Republic Procyclical? Evidence from Wavelet Analysis," Working Papers 2017/15, Czech National Bank.
    19. Müller, Carola, 2018. "Basel III capital requirements and heterogeneous banks," IWH Discussion Papers 14/2018, Halle Institute for Economic Research (IWH).
    20. repec:eee:jfinin:v:35:y:2018:i:pb:p:17-29 is not listed on IDEAS
    21. repec:ptu:bdpart:e201712 is not listed on IDEAS
    22. Gambacorta, Leonardo & Shin, Hyun Song, 2018. "Why bank capital matters for monetary policy," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 17-29.
    23. Borio, Claudio & Gambacorta, Leonardo, 2017. "Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 217-231.

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