Banks’ Regulatory Capital strongBufferstrong and the Business Cycle.pdfVIP

Banks’ Regulatory Capital Buffer and the Business Cycle: Evidence for Germany* November 2005 a b Stéphanie Stolz and Michael Wedow ______________________________________________________________________ Abstract This paper analyzes the effect of the business cycle on the regulatory capital buffer of German local banks in the period 1993–2003. The capital buffer is found to fluctuate countercyclically over the business cycle. The fluctuation is stronger for public banks than for cooperative banks. Further, low-capitalized banks do not catch up with their well-capitalized peers over the observation period. Finally, low-capitalized banks do not decrease risk-weighted assets in a business cycle downturn. This finding suggests that their low capitalization does not force them to retreat from lending. Keywords : Capital Regulation, Bank Capital, Business Cycle Fluctuations JEL classification : G21, G28 * We thank Thilo Liebig and the Department for Banking and Financial Supervision of the Deutsche Bundesbank for research support and facilities. However, the views expressed are those of the authors and do not necessarily reflect those of Deutsche Bundesbank or of the Kiel Institute for World Economics. We thank Claudia Buch, Kai Carstensen, Frank Heid, Michael Kötter, Thilo Liebig, Thorsten Nestmann, Daniel Quinten, Andrea Schertler, Dieter Urban, Beatrice Weder, and the participants of the GBSA workshop for helpful comments. a Deutsche Bundesbank, Postfach 100602, D-60006 Frankfurt am Main/Germany. E-mail address: stephanie.stolz@bundesbank.de b Deutsche Bundesbank, Postfach 100602, D-