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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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