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Empirical Evidence on the Effectiveness of Capital Buffer Release

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  • Sivec, Vasja
  • Volk, Matjaz
  • Chen, Yi-An

Abstract

With the new regulatory framework, known as Basel III, policymakers introduced a countercyclical capital buffer. It subjects banks to higher capital requirements in times of credit excess and is released in a financial crisis. This incentivizes banks to extend credit and to buffer losses. Due to its recent introduction empirical research on its effects are limited. We analyse a unique policy experiment to evaluate the effects of buffer release. In 2006, the Slovenian central bank introduced a temporary deduction item in capital calculation, creating an average capital buffer of 0.8% of risk weighted assets. It was released at the start of the financial crisis in 2008 and is akin to a release of a countercyclical capital buffer. We estimate its impact on bank behaviour. After its release, firms borrowing from banks holding 1 p.p. higher capital-buffer received 11 p.p. more in credit. Also we find the impact was greater for healthy firms, and it increased loan-loss provisioning for firms in default.

Suggested Citation

  • Sivec, Vasja & Volk, Matjaz & Chen, Yi-An, 2018. "Empirical Evidence on the Effectiveness of Capital Buffer Release," MPRA Paper 84323, University Library of Munich, Germany, revised 02 Jan 2018.
    • Handle: RePEc:pra:mprapa:84323
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    Cited by:

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    3. Carla Marques & Ricardo Martinho & Rui Silva, 2020. "Non-performing loans and bank lending: Evidence for Portugal," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.

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    More about this item

    Keywords

    countercyclical capital buffer; macroprudential policy; credit; loan loss provisions;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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