Usability of Bank Capital Buffers: The Role of Market Expectations
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Summary:
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.
Series:
Working Paper No. 2022/021
Subject:
Correspondent banking Countercyclical capital buffers COVID-19 Financial institutions Financial markets Financial regulation and supervision Financial services Health Loans Market capitalization
Frequency:
regular
English
Publication Date:
January 28, 2022
ISBN/ISSN:
9781616358938/1018-5941
Stock No:
WPIEA2022021
Pages:
61
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