scholarly journals Un-used Bank Capital Buffers and Credit Supply Shocks at SMEs during the Pandemic

2021 ◽  
Vol 2021 (041) ◽  
pp. 1-38
Author(s):  
Jose M. Berrospide ◽  
◽  
Arun Gupta ◽  
Matthew P. Seay ◽  
◽  
...  
Keyword(s):  
Global Financial Crisis ◽  
Banking System ◽  
Capital Requirements ◽  
Equity Capital ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Lending Relationships ◽  
Minimum Capital ◽  
Buffer Region ◽  
Capital Ratios

Did banks curb lending to creditworthy small and mid-sized enterprises (SME) during the COVID-19 pandemic? Sitting on top of minimum capital requirements, regulatory capital buffers introduced after the 2008 global financial crisis (GFC) are costly regions of "rainy day" equity capital designed to absorb losses and provide lending capacity in a downturn. Using a novel set of confidential loan level data that includes private SME firms, we show that "buffer-constrained" banks (those entering the pandemic with capital ratios close to this regulatory buffer region) reduced loan commitments to SME firms by an average of 1.4 percent more (quarterly) and were 4 percent more likely to end pre-existing lending relationships during the pandemic as compared to "buffer-unconstrained" banks (those entering the pandemic with capital ratios far from the regulatory capital buffer region). We further find heterogenous effects across firms, as buffer-constrained banks disproportionately curtailed credit to three types of borrowers: (1) private, bank-dependent SME firms, (2) firms whose lending relationships were relatively young, and (3) firms whose pre-pandemic credit lines contractually matured at the start of the pandemic (and thus were up for renegotiation). While the post-2008 period saw the rise of banking system capital to historically high levels, these capital buffers went effectively unused during the pandemic. To the best of our knowledge, our study is the first to: (1) empirically test the usability of these Basel III regulatory buffers in a downturn, and (2) contribute a bank capital-based transmission channel to the literature studying how the pandemic transmitted shocks to SME firms.

scholarly journals The Application of Macroprudential Capital Requirements in Managing Systemic Risk

Complexity ◽  
2018 ◽  
Vol 2018 ◽  
pp. 1-15
Author(s):  
Hong Fan ◽  
Chirongo Moses Keregero ◽  
Qianqian Gao
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Banking System ◽  
Capital Requirements ◽  
Equity Capital ◽  
Risk Allocation ◽  
Regulatory Capital ◽  
Allocation Mechanism ◽  
Bank Equity ◽  
Almost All

When setting banks regulatory capital requirement based on their contribution to the overall risk of the banking system we need to consider that the risk of the banking system as well as each banks risk contribution changes once bank equity capital gets redistributed. Therefore the present paper provides a theoretical framework to manage the systemic risk of the banking system in Nigeria based on macroprudential capital requirements, which requires banks to hold capital that is proportional to their contribution to systemic risk. Using a sample of 10 Nigerian banks, we reallocate capital in the system based on two scenarios; firstly in the situation where the system shocks do not exist in the system, we find that almost all banks appear to hold more capital; secondly, we also consider the situation where the system shocks exist in the system; we find that almost all banks tend to hold little capital on four risk allocation mechanisms. We further find that despite the heterogeneity in macroprudential capital requirements, all risk allocation mechanisms bring a substantial decrease in the systemic risk. The risk allocation mechanism based on ΔCoVaR decreases the average default probability the most. Our results suggest that financial stability can be substantially improved by implementing macroprudential regulations for the banking system.

Bank Capital Requirements after the Financial Crisis

2019 ◽  
pp. 706-735
Author(s):  
Mark E. Van Der Weide ◽  
Jeffrey Y. Zhang
Keyword(s):  
Financial Crisis ◽  
Structural Changes ◽  
Banking Sector ◽  
Balance Sheet ◽  
Banking System ◽  
Capital Requirements ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Stress Tests ◽  
Global Banking

Regulators responded with an array of strategies to shore up weaknesses exposed by the 2008 financial crisis. This chapter focuses on reforms to bank capital regulation. We first discuss the ways in which the post-crisis Basel III reforms recalibrated the existing framework by improving the quality of capital, increasing the quantity of capital, and improving the calculation of risk weights. We then shift to the major structural changes in the regulatory capital framework—capital buffers on top of the minimum requirements; a leverage ratio that explicitly accounts for off-balance-sheet exposures; risk-based and leverage capital surcharges on the largest banks; bail-in debt to facilitate orderly resolution; and forward-looking stress tests. We conclude with a quantitative assessment of the evolution of capital in the global banking system and in the US banking sector.

scholarly journals Peculiarities of ensuring financial sustainability of the Ukrainian banking system

2018 ◽  
Vol 13 (1) ◽  
pp. 184-195
Author(s):  
Olha Vovchak ◽  
Viktoriia Rudevska ◽  
Roksolana Holub
Keyword(s):  
Commercial Banks ◽  
Financial Stability ◽  
Banking System ◽  
Developed Countries ◽  
Equity Capital ◽  
Capital Adequacy ◽  
Financial Sustainability ◽  
Bank Capital ◽  
Strategic Objective ◽  
Capital Ratios

Ensuring and strengthening the financial sustainability of banks is a difficult and not completely resolved task. It is inherent not only to developed countries, it has also be¬come nationally important in Ukraine, which was largely predetermined by the specifics of the domestic banks development. This is explained, in particular, by the banking insti¬tutions’ focus mainly on the relatively short-term activity, the need to work under high risk, resulting from economic and political instability in the country. Therefore, nowa¬days, it is urgent for each Ukrainian bank to focus on the main strategic objective – effec¬tive management and ensuring financial sustainability. The purpose of this study is to assess the current state and identify the features of ensuring financial sustainability of the banking system of Ukraine.It was pointed out in the study that the negative tendency to increase the number of in¬solvent commercial banks during 2012–2017 indicates problems with providing finan¬cial sustainability to commercial banks. The tendencies have been revealed that testify to the problems of the banking system capitalization in Ukraine, which greatly affects its financial stability. Given the analysis of indicators of banks financial sustainability that characterize the bank capital adequacy, the conclusion is made on ambiguous as¬sessment of sufficient level of capitalization, since despite the correspondence of most values of coefficients to the indicators, there is a lack of capitalization of the domestic banking system and equity capital concentration. In general, the results made it pos¬sible to identify trends in the development of capital ratios and financial sustainability indicators and to shape appropriate measures to increase the level of capitalization in order to ensure the financial sustainability of the banking system.

scholarly journals Bank regulation and risk in Europe and Central Asia since the global financial crisis

2020 ◽  
Vol 10 (1) ◽  
pp. 75-93
Author(s):  
Deniz Anginer ◽  
Asli Demirgüç-Kunt ◽  
Davide Salvatore Mare
Keyword(s):  
Financial Crisis ◽  
Central Asia ◽  
Financial Stability ◽  
Global Financial Crisis ◽  
Bank Risk ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Capital Ratios ◽  
Definition Of ◽  
The Global Financial Crisis

This paper examines changes in bank capital and capital regulations since the global financial crisis, in the Europe and Central Asia region. It shows that banks in Europe and Central Asia are better capitalized, as measured by regulatory capital ratios, than they were prior to the crisis. However, the increase in simple equity ratios for the same banks has been smaller over the past 10 years. The increases in regulatory capital ratios have coincided with a reduction in the stringency of the definition of Tier 1 capital and reduction in risk-weights. We further analyze the relationship between bank capital and bank risk using individual bank data. We show that bank risk in Europe and Central Asia is more sensitive to changes in simple leverage ratios than changes in regulatory capital ratios, consistent with the notion that equity ratios only include high-quality capital and do not rely on internal risk models to compute risk-weights. Although there has been some effort to increase capital and liquidity requirements for institutions deemed systemically important, the region has been lagging in addressing the resolution of these institutions. In line with Demirguc-Kunt, Detragiache, and Merrouche (2013), our findings show the importance of the definition of bank capital to assure bank financial stability in Europe and Central Asia.

scholarly journals Implementing the countercyclical capital buffer in South Africa: Practical considerations

2015 ◽  
Vol 18 (1) ◽  
pp. 105-127 ◽  
Author(s):  
Pravin Burra ◽  
Pieter Juriaan De Jongh ◽  
Helgard Raubenheimer ◽  
Gary Van Vuuren ◽  
Henco Wiid
Keyword(s):  
South African ◽  
Systemic Risk ◽  
Financial Distress ◽  
Banking System ◽  
Capital Requirements ◽  
Critical Discussion ◽  
Basel Iii ◽  
Risk Indicator ◽  
Bank Capital ◽  
Minimum Capital

The Basel II regulatory framework significantly increased the resilience of the banking system, but proved ineffective in preventing the 2008/9 financial crisis. The subsequent introduction of Basel III aimed, inter alia, to supplement bank capital using buffers. The countercyclical buffer boosts existing minimum capital requirements when systemic risk surges are detected. Bolstering capital in favourable economic conditions cushions losses in unfavourable conditions, thereby addressing capital requirement procyclicality. This paper contains an overview of the countercyclical capital buffer and a critical discussion of its implementation as proposed in Basel III. Consequences of the buffer's introduction for South African banks are explored, and in particular, potential systemic risk indicator variables are identified that may be used by the South African Reserve Bank (SARB) as early warning indicators of imminent systemic financial distress. These indicators may be of value to the SARB, which could use them in taking decisions on the build-up and release of the countercyclical buffer for South African banks.

scholarly journals Does Going Tough on Banks Make the Going Get Tough? Bank Liquidity Regulations, Capital Requirements, and Sectoral Activity

2020 ◽  
Vol 20 (103) ◽  
Author(s):  
Deniz Igan ◽  
Ali Mirzaei
Keyword(s):  
Global Financial Crisis ◽  
Emerging Market ◽  
Capital Requirements ◽  
Bank Capital ◽  
External Finance ◽  
Capital Ratios ◽  
Investment Rates ◽  
Cross Country ◽  
Using Data ◽  
The Global Financial Crisis

Whether and to what extent tougher bank regulation weighs on economic growth is an open empirical question. Using data from 28 manufacturing industries in 50 countries, we explore the extent to which cross-country differences in bank liquidity and capital levels were related to differences in sectoral activity around the period of the global financial crisis. We find that industries which are more dependent on external finance, in countries where banks had higher liquidity and capital ratios, performed relatively better during the crisis, with regard to investment rates and the creation of new enterprises. This relationship, however, exists only for bank-based systems and emerging market economies. In the pre-crisis period, we find only a marginal link to bank capital. These findings survive a battery of robustness checks and provide some solid support for the tighter prudential measures introduced under Basel III.

scholarly journals Bank Capital and the Cost of Equity

2019 ◽  
Vol 19 (265) ◽  
Author(s):  
Mohamed Belkhir ◽  
Sami Ben Naceur ◽  
Ralph Chami ◽  
Anis Semet
Keyword(s):  
Capital Requirements ◽  
Equity Capital ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Cost Of Equity ◽  
Percentage Point Increase ◽  
Point Increase ◽  
Negative Effect ◽  
The Cost ◽  
The Impact

Using a sample of publicly listed banks from 62 countries over the 1991-2017 period, we investigate the impact of capital on banks’ cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs.

scholarly journals Capital regulations, supervision and the international harmonization of bank capital ratios

2017 ◽  
Vol 12 (1) ◽  
pp. 175-183 ◽  
Author(s):  
Kevin T. Jacques
Keyword(s):  
Theoretical Model ◽  
Capital Requirements ◽  
Necessary Condition ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Bank Supervision ◽  
Playing Field ◽  
Capital Ratios ◽  
Capital Standard ◽  
Capital Regulations

In recent decades, despite the Basel Committee’s effort to develop internationally uniform regulatory capital standards, the capital ratios of banks across countries continue to exhibit significant differences. This paper examines the fundamental question of whether, given a uniform regulatory capital standard, regulators should expect similar banks to exhibit similar risk-based capital ratios. More specifically, this study develops a one-period theoretical model to examine the level playing field argument in light of not only uniform regulatory capital standards but also differences in bank supervision. The results of the theoretical model suggest that even with an internationally uniform risk-based capital requirement, it is unreasonable to expect banks in different countries to hold similar capital ratios. This occurs, in part, because regulators have discretion in how they apply the risk-based capital standards. Furthermore, the results suggest that a necessary condition for banks to exhibit similar capital ratios is that uniform capital requirements must be accompanied by a uniform stringency and application of regulatory supervision.

scholarly journals On the Rising Complexity of Bank Regulatory Capital Requirements: From Global Guidelines to their United States (US) Implementation

2018 ◽  
Vol 11 (4) ◽  
pp. 77 ◽  
Author(s):  
James R. Barth ◽  
Stephen Matteo Miller
Keyword(s):  
United States ◽  
Latin American ◽  
Debt Crisis ◽  
The United States ◽  
Capital Requirements ◽  
Capital Adequacy ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Minimum Capital ◽  
The Us

After the Latin American Debt Crisis of 1982, the official response worldwide turned to minimum capital standards to promote stable banking systems. Despite their existence, however, such standards have still not prevented periodic disruptions in the banking sectors of various countries. After the 2007–2009 crisis, bank capital requirements have, in some cases, increased and overall have become even more complex. This paper reviews (1) how Basel-style capital adequacy guidelines have evolved, becoming higher in some cases and overall more complex, (2) how the United States (US) implementation of these guidelines has contributed to regulatory complexity, even when omitting other bank capital regulations that are specific to the US, and (3) how the US regulatory measures still do not provide equally valuable information about whether a bank is adequately capitalized.

scholarly journals Finding the Bad Apples in the Barrel

2019 ◽  
Vol 19 (180) ◽  
Author(s):  
Will Kerry
Keyword(s):  
Banking Sector ◽  
Banking System ◽  
Equity Market ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Capital Ratios ◽  
Market Valuations ◽  
Better Than

This paper measures the performance of different metrics in assessing banking system vulnerabilities. It finds that metrics based on equity market valuations of bank capital are better than regulatory capital ratios, and other metrics, in spotting banks that failed (bad apples). This paper proposes that these market-based ratios could be used as a surveillance tool to assess vulnerabilities in the banking sector. While the measures may provide a somewhat fuzzy signal, it is better to have a strategy for identifying bad apples, even if sometimes the apples turn out to be fine, than not being able to spot any bad apples before the barrel has been spoiled.

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