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How Cyclical Is Bank Capital?

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.

Suggested citation: Haubrich, Joseph G., 2015. “How Cyclical Is Bank Capital?” Federal Reserve Bank of Cleveland, Working Paper no 15-04.

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