Bank Capital And Uncertainty

An important role for bank capital is that of a buffer against unexpected losses. As uncertainty about these losses increases, the theory predicts an increase in the optimal level of bank capital. This paper investigates this implication empirically with U.S. Commercial Banks data and finds statistically significant and robust evidence supporting it. A counterfactual experiment suggests that a decline in uncertainty to the lowest level measured in the sample generates an average reduction in bank capital ratios of slightly over 1 percentage point. However, the publisher also finds suggestive evidence that the intensity of this precautionary motive is stronger during recessions.

Provided by: International Monetary Fund Topic: Data Management Date Added: Sep 2010 Format: PDF

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