The value of bank capital buffers in maintaining financial system resilience
Harald Scheule and
Eliza Wu ()
Journal of Financial Stability, 2017, vol. 33, issue C, 23-40
There is a current controversy concerning the appropriate size of banks’ capital requirements, and the trade-off between the costs and benefits of implementing higher capital requirements. We quantify the size of capital buffers required to reduce system-wide losses using confidential regulatory data for Australian banks from 2002 to 2014 and annual public accounts from 1978 to 2014. We find that a moderate increase in bank capital buffers is sufficient to maintain financial system resilience, even after taking economic downturns into consideration. Furthermore, while banks benefit from paying a lower cost of debt when they have a higher capital buffer, lending volumes are lower indicating that credit supply may be hampered if bank capital levels are too high within a financial system.
Keywords: Capital buffer; Loan loss provisions; Systemic risk; Financial resilience (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:33:y:2017:i:c:p:23-40
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