The Impact of Capital Buffers on Future Loan Growth, Interest Income and Tier 1 Capital Ratios

35 Pages Posted: 20 Aug 2016 Last revised: 24 Aug 2016

See all articles by Jyotirmoy Podder

Jyotirmoy Podder

Torrens University Australia

Tariq H. Haque

University of Adelaide; Financial Research Network (FIRN)

Date Written: August 23, 2016

Abstract

The literature on banking supervision largely focuses on maintenance of capital adequacy. Many banks, however, appear to have much higher capital ratios than the minimum required (Ayuso et al., 2004; Jokipii and Milne, 2008; Shim, 2013). In this paper, we show that bank capital buffers (actual capital minus the minimum required) are positively associated with future loan growth, future interest income and the future Tier 1 capital ratio. We, however, find that banks with low capital buffers experience a reduction in their future Tier 1 Capital ratio while banks with high capital buffers experience increased future loan growth and an increase in the future Tier 1 Capital Ratio. We, therefore, extend Foos et al. (2010) who show that loan growth leads to increased loan loss provisions and lower capital ratios by allowing for the level of capital buffer.

Keywords: Capital adequacy, Loan Growth

JEL Classification: G20, G21

Suggested Citation

Podder, Jyotirmoy and Haque, Tariq H., The Impact of Capital Buffers on Future Loan Growth, Interest Income and Tier 1 Capital Ratios (August 23, 2016). 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2826347 or http://dx.doi.org/10.2139/ssrn.2826347

Jyotirmoy Podder

Torrens University Australia ( email )

220 Victoria Square
GPO Box 2025
Adelaide, South Australia 5000
Australia
+ 61 8 8113 7816 (Phone)

Tariq H. Haque (Contact Author)

University of Adelaide ( email )

10 Pulteney St, Adelaide Busines School
Adelaide, South Australia 5005
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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