Banks' regulatory capital buffer and the business cycle: evidence for German savings and cooperative banks

This paper analyzes the effect of the business cycle on the regulatory capital buffer of German savings and cooperative banks in the period 1993-2003. The capital buffer is found to fluctuate anticyclically over the business cycle. The fluctuation is stronger for savings banks than for cooperative banks, as, for savings banks, risk-weighted assets fluctuate more strongly with the business cycle. Further, low-capitalized banks do not catch up with their wellcapitalized peers. The gap between low-capitalized and well capitalized banks even widened over the observation period. Finally, low-capitalized banks do not decrease risk-weighted assets in a business cycle downturn by more than well-capitalized banks. This finding seems to imply that their low capitalization does not force them to retreat from lending.