nr 009 - Is Bank Capital Procyclical? A Cross-Country Analysis

DNB Working Papers
Date 2 September 2004
This paper investigates the determinants of commercial banks’ own internal capital targets and potential sensitivity of these levels to the business cycle . World-wide results make clear that banks’ own risk is only slightly dependent on the business cycle. Banks tend to hold substantial capital buffers on top of minimum requirements, reflecting that they hold capital for other reasons than strictly meeting the capital requirements. These results suggest that actual capital levels may not become substantially more procyclical under the new risk-sensitive Basel II regime. However, a number of banks, especially smaller ones, combine a relatively risky portfolio with limited buffer capital. A more risk-sensitive capital regulation regime could force these banks to obtain higher capital levels, which would make them more procyclical. JEL: E32, G21, G28, G31; Key words: Basel II, BIS capital ratio, bank’s own capital targets, credit crunch, business cycle