Bank Capital Buffer and Risk Adjustment Decisions
Terhi Jokipii and Alistair Milne
Issue
2009-09
Pages
54
JEL classification
G21, G28, G32
Keywords
Bank capital, Portfolio Risk, Regulation
Year
2009
Building an unbalanced panel of United States (US) bank holding company (BHC) and commercial bank balance sheet data from 1986 to 2006, we examine the relationship between short-term capital buffer and portfolio risk adjustments. Our estimations indicate that the relationship over the sample period is a positive two-way relationship. Moreover, we show that the management of such adjustments is dependent on the degree of bank capitalization. Further investigation through time-varying analysis reveals a cyclical pattern in the uncovered relationship: negative after the 1991/1992 crisis, and positive before 1991 and after 1997.