Usability of Bank Capital Buffers: The Role of Market Expectations

January 28, 2022

Preview Citation

Format: Chicago

José Abad, and Antonio Garcia Pascual. Usability of Bank Capital Buffers: The Role of Market Expectations, (USA: International Monetary Fund, 2022) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.

Subject: Correspondent banking, Countercyclical capital buffers, COVID-19, Financial institutions, Financial markets, Financial regulation and supervision, Financial services, Health, Loans, Market capitalization

Keywords: Bank Capital Structure, Basel III, Buffer Usability, Capital Buffers, Capital Regulation, Capital shortfall, Correspondent banking, Countercyclical capital buffers, COVID-19, Financial Institutions, Global, Loans, Macropru, Market capitalization, Market expectation, Valuation model

Publication Details

Pages:

61
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/021
Stock No:

WPIEA2022021
ISBN:

9781616358938
ISSN:

1018-5941

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