Two-way interplays between capital buffers, credit and output: evidence from French banks

Jerome Coffinet, Virginie Coudert (), A. Pop and Cyril Pouvelle

Working papers from Banque de France

Abstract: We assess the extent to which capital buffers (the capital banks hold in excess of the regulatory minimum) exacerbate rather than reduce the cyclical behavior of credit. We empirically study the relationships between output gap, capital buffers and loan growth with firm-level data for French banks over the period 1993 2009. Our findings reveal that bank capital buffers intensify the cyclical credit fluctuations arising from the output gap developments, all the more as better quality capital is considered. Moreover, by performing Granger causality tests at the bank level, we find evidence of a two-way causality between capital buffers and loan growth, pointing to mutually reinforcing mechanisms. Overall, those empirical results lend support to a countercyclical financial regulation that focuses on highest-quality capital and aims at smoothing loan growth.

Keywords: Bank Capital Regulation; Procyclicality; Capital Buffers; Business Cycle Fluctuations; Basel III. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-eff, nep-mic, nep-reg and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:316

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