{
  "title": "Bank Capital and Uncertainty",
  "publication": "IMF Working Papers, September 1, 2010",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-capital-and-uncertainty-24199",
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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.",
  "sections": [
    {
      "heading": "Summary and key findings",
      "content": "- An important role for bank capital is that of a buffer against unexpected losses.\n- Theory predicts that as uncertainty about unexpected losses increases, the optimal level of bank capital increases.\n- Empirical investigation using U.S. Commercial Banks data finds statistically significant and robust evidence supporting this prediction.\n- 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.\n- There is suggestive evidence that the intensity of the precautionary motive for holding capital is stronger during recessions."
    },
    {
      "heading": "Empirical approach and results",
      "content": "- Data source: U.S. Commercial Banks (as used in the paper).\n- Main empirical result: higher measured uncertainty is associated with higher bank capital ratios (statistically significant and robust).\n- Counterfactual experiment outcome: average reduction in bank capital ratios of slightly over 1 percentage point when uncertainty declines to the sample minimum.\n- Recession interaction: precautionary response appears stronger in recessions (evidence described as suggestive)."
    },
    {
      "heading": "Policy implications",
      "content": "- Countercyclical capital requirements intended to release capital during downturns could be undermined by banks’ desire to hold more capital in response to increased uncertainty.\n- Policymakers should account for precautionary capital accumulation driven by uncertainty when designing countercyclical bank regulation and capital buffers."
    },
    {
      "heading": "Subject areas and keywords",
      "content": "- Subject: Banking; Capital adequacy requirements; Countercyclical capital buffers; Financial crises; Financial institutions; Financial regulation and supervision; Loans; National accounts; Precautionary savings\n- 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\n\n---\n\n Content in this bundle\n\n- Bank Capital and Uncertainty; by Fabian Valencia; IMF Working Paper 10/208; September 1, 2010\n  - Bank Capital and Uncertainty; by Fabian Valencia; IMF Working Paper 10/208; September 1, 2010 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Bank Capital and Uncertainty; by Fabian Valencia; IMF Working Paper 10/208; September 1, 2010 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/bank-capital-and-uncertainty-24199"
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    "Authors: Fabian Valencia",
    "Published: September 1, 2010",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781455205394.001",
    "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.",
    "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).",
    "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: 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",
    "**Bank Capital and Uncertainty; by Fabian Valencia; IMF Working Paper 10/208; September 1, 2010**"
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      "title": "Bank Capital and Uncertainty; by Fabian Valencia; IMF Working Paper 10/208; September 1, 2010",
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