Empirical Evidence on the Effectiveness of Capital Buffer Release

Sivec, Vasja and Volk, Matjaz and Chen, Yi-An (2018): Empirical Evidence on the Effectiveness of Capital Buffer Release.

Abstract

With the new regulatory framework, known as Basel III, policymakers introduced a countercyclical capital buffer. It subjects banks to higher capital requirements in times of credit excess and is released in a financial crisis. This incentivizes banks to extend credit and to buffer losses. Due to its recent introduction empirical research on its effects are limited. We analyse a unique policy experiment to evaluate the effects of buffer release. In 2006, the Slovenian central bank introduced a temporary deduction item in capital calculation, creating an average capital buffer of 0.8% of risk weighted assets. It was released at the start of the financial crisis in 2008 and is akin to a release of a countercyclical capital buffer. We estimate its impact on bank behaviour. After its release, firms borrowing from banks holding 1 p.p. higher capital-buffer received 11 p.p. more in credit. Also we find the impact was greater for healthy firms, and it increased loan-loss provisioning for firms in default.

• Item Type: MPRA Paper
• Language: English
• Keywords: countercyclical capital buffer, macroprudential policy, credit, loan loss provisions
• Subjects: G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

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