Bank Capital and Uncertainty
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Summary:
An important role for bank capital is that of a buffer against unexpected losses. As uncertainty about these losses increases, the theory predicts an increase in the optimal level of bank capital. This paper investigates this implication empirically with U.S. Commercial Banks data and finds statistically significant and robust evidence supporting it. A counterfactual experiment suggests that a decline in uncertainty to the lowest level measured in the sample generates an average reduction in bank capital ratios of slightly over 1 percentage point. However, I also find suggestive evidence that the intensity of this precautionary motive is stronger during recessions. From a policy perspective, these results suggest that the effectiveness of countercyclical capital requirements during bad times will be undermined by banks desire to hold more capital in response to increased uncertainty.
Series:
Working Paper No. 2010/208
Subject:
Banking Capital adequacy requirements Countercyclical capital buffers Financial crises Financial institutions Financial regulation and supervision Loans National accounts Precautionary savings
English
Publication Date:
September 1, 2010
ISBN/ISSN:
9781455205394/1018-5941
Stock No:
WPIEA2010208
Pages:
22
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