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How individual capital requirements affect capital ratios in UK banks and building societies

Isaac Alfon (), Isabel Argimon () and Patricia Bascuñana-Ambrós ()
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Isaac Alfon: Capital Markets and Governance Team, HM Treasury
Patricia Bascuñana-Ambrós: Finance, Strategy and Risk Division, Financial Services Authority

No 515, Working Papers from Banco de España

Abstract: The UK's Financial Services Authority sets individual capital requirements that reflect its assessment of risks and that are greater than the 8% minimum required by Basel. This approach is similar to the supervisory review in Pillar II proposed in the new Basel Accord. Using regulatory returns for UK banks and building societies, we empirically assess how changing a firm's individual capital requirement affects its capital ratio. We find that banks faced with an increase in capital requirements transfer nearly 50% of the increase into changes in their capital holdings, but only 20% if they face a reduction. The results are different for building societies, where about 20% of either an increase or a decrease in capital requirements is transferred into capital ratios.

Keywords: banks; building societies; capital requirements (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005-06
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