Project Management

Bank Capital Buffer And Risk Adjustment Decisions

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Executive Summary

Building an unbalanced panel of United States (US) Bank Holding Company (BHC) and commercial bank balance sheet data from 1986 to 2006, the authors examine the relationship between short-term capital buffer and portfolio risk adjustments. The estimations indicate that the relationship over the sample period is a positive two-way relationship. Moreover, they show that the management of such adjustments is dependent on the degree of bank capitalization. Further investigation through time-varying analysis reveals a cyclical pattern in the uncovered relationship: negative after the 1991/1992 crisis, and positive before 1991 and after 1997.

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