Bank Reactions after Capital Shortfalls

National Bank of Belgium Working Paper No. 250

37 Pages Posted: 20 Dec 2013

See all articles by Christoffer Kok

Christoffer Kok

European Central Bank (ECB)

Glenn Schepens

ECB -Financial Research Division

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2013

Abstract

This paper investigates whether European banks have capital targets and how deviations from the target impact their equity composition and activity mix. Using quarterly data for a sample of large European banks between 2004 and 2011, we show that there are notable asymmetries in banks’ reactions to deviations from optimal capital levels. Banks prefer to reshuffle risk-weighted assets or increase asset holdings when being above their optimal Tier 1 ratio, whereas they rather try to increase equity levels or reshuffle risk-weighted assets without changing asset holdings when being below target. At the same time, focusing instead on a unweighted equity ratio target, we find evidence of deleveraging and lower loan growth for undercapitalized banks during the recent financial crisis, whereas in the pre-crisis periods banks primarily reacted to deviations from their optimal target by adjusting equity levels.

Keywords: Banking, banking capital optimization, financial regulation, deleveraging, capital structure

JEL Classification: D22, E44, G20, G21, G28

Suggested Citation

Kok, Christoffer and Schepens, Glenn, Bank Reactions after Capital Shortfalls (December 19, 2013). National Bank of Belgium Working Paper No. 250. Available at SSRN: https://ssrn.com/abstract=2369800 or http://dx.doi.org/10.2139/ssrn.2369800

Christoffer Kok (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Glenn Schepens

ECB -Financial Research Division ( email )

Frankfurt am Main
Germany

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