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
Date Written: August 23, 2016
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: Suggested Citation