Bank Capital and Uncertainty
IMF Working Papers, September 1, 2010
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Bibliographic details
- Authors: Fabian Valencia
- Published: September 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455205394.001
Summary and key findings
- An important role for bank capital is that of a buffer against unexpected losses.
- Theory predicts that as uncertainty about unexpected losses increases, the optimal level of bank capital increases.
- Empirical investigation using U.S. Commercial Banks data finds statistically significant and robust evidence supporting this prediction.
- 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.
- There is suggestive evidence that the intensity of the precautionary motive for holding capital is stronger during recessions.
Empirical approach and results
- Data source: U.S. Commercial Banks (as used in the paper).
- Main empirical result: higher measured uncertainty is associated with higher bank capital ratios (statistically significant and robust).
- Counterfactual experiment outcome: average reduction in bank capital ratios of slightly over 1 percentage point when uncertainty declines to the sample minimum.
- Recession interaction: precautionary response appears stronger in recessions (evidence described as suggestive).
Policy implications
- Countercyclical capital requirements intended to release capital during downturns could be undermined by banks’ desire to hold more capital in response to increased uncertainty.
- Policymakers should account for precautionary capital accumulation driven by uncertainty when designing countercyclical bank regulation and capital buffers.
Subject areas and keywords
- Subject: Banking; Capital adequacy requirements; Countercyclical capital buffers; Financial crises; Financial institutions; Financial regulation and supervision; Loans; National accounts; Precautionary savings
- Keywords: bank borrowing costs change; bank capital holding; bank leverage; Banking; Banking Capital; Capital adequacy requirements; capital structure; countercyclical bank regulation; Countercyclical capital buffers; Loans; off-balance sheet activity; precautionary motive; Precautionary savings; Risk; Uncertainty; WP
Content in this bundle
- Bank Capital and Uncertainty; by Fabian Valencia; IMF Working Paper 10/208; September 1, 2010