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The purpose of the present paper is to shed some light on why Portuguese banks hold significant capital buffers above the required regulatory minimum, through the estimation of a dynamic panel data model. The main findings are that the capital buffer is positively influenced by several broad risk measures, suggesting that the introduction of the more sensitive regulation in Basel II might not affect Portuguese banks' capital ratios as much as one could expect. Provisions and high and stable profitability are found to be substitutes for capital buffers, whereas larger banks seem to hold less excess capital.
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