How Cyclical Is Bank Capital?
||Revisions: WP 15-04R|
The alleged pro-cyclicality of bank capital (high in good times, low in bad) has received some blame for the recent financial crisis. Others blame the counter-cyclicality of capital regulations: too low in high times and too high in bad. To address this problem, Basel III has introduced counter-cyclical capital buffers for large banks. But just how cyclical is bank capital? We look at the question from several vantage points, using both detailed recent data on risk-weighted assets and several sources of annual data going back to 1834. To help understand the historical data, we provide a short summary of capital concepts and regulation from early America to the present.
Keywords: Bank capital, business cycles.
JEL Classification: G21, E32, G28, N20.