Keywords
banks; euro area; capital ratios; credit supply; partial adjustment model
Abstract
This paper estimates euro area banks’ internal target capital ratios and investigates whether banks’ adjustment to the targets affects their credit supply and securities holdings during the financial crisis in 2005–2011. Based on data on listed banks and country-specific macro-variables, a partial adjustment model is estimated in a panel context. The results indicate, first, that an increase in the riskiness of banks’ balance sheets positively influences banks’ target capital ratios. On the euro area level, we find banks’ undercapitalisation in terms of Tier 1 capital ratio to be close to 2 percentage points in the middle of 2008. While median capital gaps diminish towards the end of 2011, the heterogeneity across individual banks increases. Second, the adjustment towards higher equilibrium capital ratios has a significant impact on banks’ assets. The impact is more sizeable on security holdings than on loans, thereby suggesting a pecking order of bank assets for deleveraging.
Acknowledgments
We would like to thank Florian Heider, Koen Schoors, Ari Hyytinen, Hannu Piekkola and anonymous referees for their insightful comments. We are also grateful to participants and discussants at the Eurosystem seminar organized by the ECB in June 2011; the Conference held as part of the XXXIV Annual Meeting of the Finnish Economic Association in Vaasa in February 2012; and the INFINITI Conference on International Finance in Trinity College Dublin in June 2012, for their useful suggestions. All errors in this paper are the sole responsibility of the authors. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Eurosystem, the European Central Bank or the Bank of Finland.
Recommended Citation
Maurin, L., & Toivanen, M. (2024). Risk, capital buffers and bank lending: The adjustment of euro area banks. Journal of Banking and Financial Economics, 2015(3), 113-129. https://doi.org/10.7172/2353-6845.jbfe.2015.1.5
First Page
113
Last Page
129
Page Count
17
Received Date
26 January 2015
Revised Date
27 February 2015
Accept Date
10 March 2015
Online Available Date
7 April 2015
DOI
10.7172/2353-6845.jbfe.2015.1.5
JEL Code
G01; G21
Publisher
University of Warsaw