Bank Capital Buffer and Liquidity: Evidence from US and European Publicly Traded Banks

61 Pages Posted: 17 Sep 2012

See all articles by Caroline Roulet

Caroline Roulet

University of Limoges; JPLCSASU

Isabelle Distinguin

Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2012

Abstract

The theory of financial intermediation highlights various channels through which capital and liquidity are interrelated. Using a simultaneous-equations framework, we investigate the relationship between bank capital buffer and liquidity for European and US publicly traded commercial banks from 2000 to 2008. Previous research studying the determinants of bank capital buffer has neglected the role of liquidity. On the whole, we find that banks do not strengthen their capital buffer when they face higher illiquidity as defined in the Basel III accords or when they create more liquidity as measured by Berger and Bouwman (2009). However, considering other measures of illiquidity that focus more closely on core deposits in the US, our results show that, except for very large institutions, banks do actually build larger capital buffers when they are exposed to higher illiquidity. Our empirical investigation supports the need to implement minimum liquidity ratios concomitantly to capital ratios, as stressed by the Basel Committee; but, our findings also shed light on the need to further clarify how to define and measure illiquidity and also on how to consider very large banking institutions which behave differently than smaller ones.

Keywords: Bank Regulatory Capital Buffer, Liquidity, Bank Regulation

JEL Classification: G21, G28

Suggested Citation

Roulet, Caroline and Distinguin, Isabelle and Tarazi, Amine, Bank Capital Buffer and Liquidity: Evidence from US and European Publicly Traded Banks (March 1, 2012). 29th International Conference of the French Finance Association (AFFI) 2012, Available at SSRN: https://ssrn.com/abstract=2079655 or http://dx.doi.org/10.2139/ssrn.2079655

Caroline Roulet

University of Limoges ( email )

rue François Mitterrand
Limoges Cedex, FL Limoges 87031
France

JPLCSASU ( email )

54 avenue de la Révolution
Limoges, Limousin 87000
France

Isabelle Distinguin

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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