Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 56: The Cyclical Behaviour of European Bank Capital Buffers

Terhi Jokipii and Alistair Milne ()
Additional contact information
Terhi Jokipii: Stockholm School of Economics, Postal: P O Box 6501, SE-113 83 Stockholm, Sweden
Alistair Milne: Bank of Finland and Cass Business School

Abstract: 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 procyclical impact of Basel II.

Keywords: Bank capital; bank regulation; business cycle fluctuations

JEL-codes: G21; G28

22 pages, July 15, 2007

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