Bank Capital and Uncertainty

September 1, 2010

Preview Citation

Format: Chicago

Fabian Valencia. Bank Capital and Uncertainty, (USA: International Monetary Fund, 2010) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

An important role for bank capital is that of a buffer against unexpected losses. As uncertainty about these losses increases, the theory predicts an increase in the optimal level of bank capital. This paper investigates this implication empirically with U.S. Commercial Banks data and finds statistically significant and robust evidence supporting it. A counterfactual experiment suggests that a decline in uncertainty to the lowest level measured in the sample generates an average reduction in bank capital ratios of slightly over 1 percentage point. However, I also find suggestive evidence that the intensity of this precautionary motive is stronger during recessions. From a policy perspective, these results suggest that the effectiveness of countercyclical capital requirements during bad times will be undermined by banks desire to hold more capital in response to increased uncertainty.

Subject: Banking, Capital adequacy requirements, Countercyclical capital buffers, Financial crises, Financial institutions, Financial regulation and supervision, Loans, National accounts, Precautionary savings

Keywords: Bank borrowing costs change, Bank capital holding, Bank leverage, Banking, Banking Capital, Capital adequacy requirements, Capital structure, Countercyclical bank regulation, Countercyclical capital buffers, Loans, Off-balance sheet activity, Precautionary motive, Precautionary savings, Risk, Uncertainty, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/208
Stock No:

WPIEA2010208
ISBN:

9781455205394
ISSN:

1018-5941

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