XXVI Edition

14-15-16 December 2017"

Assessing the Cyclical Behaviour of Bank Capital Buffers in a Finance-Augmented Macro-Economy

Whyte Kemar, The Univeristy of Sheffield

This paper empirically analyses how the capital buffer held by banks behave over the business cycle after financial factors have been accounted for. Using a large panel of banks for the period 2000-2014, we document evidence that capital buffers behave significantly more procyclical than previously found in the literature. Furthermore, we also show that this relationship is more pronounced for large banks where access to capital equity markets and external support (bail-out) is likely to constitute a strong incentive to increase credit exposure and lower capital reserves accordingly. The results also suggest that the negative relationship is driven by commercial banks. Overall, these results have important implications for the development of macroprudential policy tools for the global financial system.

Area: Young Economists Session (YES award)

Keywords: Pro-cyclicality; Capital Buffers; Business Cycle; Financial Cycle; Macroprudential Policy

Paper file

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