The cyclical behaviour of European bank capital buffers

By T. Jokipii, Alistair Milne. 2008

433 citations recorded by the source corpus.

Using an unbalanced panel of accounting data from 1997 to 2004 and controlling for individual bank costs and risk, we find capital buffers of the banks in the EU15 have a significant negative co-movement with the cycle. For banks in the accession countries there is significant positive co-movement. Capital buffers of commercial and savings banks, and of large banks, exhibit negative co-movement. Those of co-operative and smaller banks exhibit positive co-movement. Speeds of adjustment are fairly slow. We interpret these results and discuss policy implications, noting that negative co-movement of capital buffers will exacerbate the pro-cyclical impact of Basel II.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/cc6ed8fb7c207701a9dccdb09d3d4600a716c98a

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Citations in the corpus

• Bank Market Power, Economic Growth and Financial Stability: Evidence from Asian Banks (2011, background): “In this sense our work is also related to the literature on the procyclicality of bank capital buffer, showing that banks hold lower capital as economic growth increases (Ayuso et al, 2004; Jokipii and Milne, 2008).”
• How bank capital buffers vary across countries: the influence of cost of deposits, market power and bank regulation (2010, background): “Using an international bank database, Jokipii and Milne (2008) find a similar negative relation for the 15 countries of the European activities, along with disclosure, generosity of deposit insurance, and quality of institutions.”
• Pro-Cyclical Capital Regulation and Lending (2016, neutral): “6See Ayuso, Pérez, and Saurina (2004), Lindquist (2004), Jokipii and Milne (2008).”
• Bank regulation, property prices and early warning systems for banking crises in OECD countries (2010, background): “5 Jokipii and Milne (2008) note that capital adequacy of European banks has a negative comovement with the cycle, which our work suggests exacerbates the risk of crises.”
• Asymmetric effects of the business cycle on bank credit risk. (2009, background): “Indeed, the identification of those banks that are more likely to be affected by recessionary conditions – and that therefore should build higher capital buffers in expansion – may help smooth the fluctuations of capital requirements, thus reducing Basel 2 cyclicality (Jokipii and Milne, 2008).”
• Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks (2013, methodology): “To deal with this issue and following Jokipii and Milne (2008), the regulatory minimum risk weighted capital ratio is set at 9% in this study for UK banks.”