Usability of Bank Capital Buffers: The Role of Market Expectations

José Abad and Antonio Garcia Pascual

No 2022/021, IMF Working Papers from International Monetary Fund

Abstract: Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.

Keywords: Capital Buffers; Basel III; Capital Regulation; Financial Institutions; Macropru; valuation model; buffer Usability; market expectation; bank Capital Structure; capital shortfall; Countercyclical capital buffers; Correspondent banking; Loans; Market capitalization; COVID-19; Global (search for similar items in EconPapers)
Pages: 61
Date: 2022-01-28
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa and nep-mon
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Citations: View citations in EconPapers (9)

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