Two-Way Interplays between Capital Buffers, Credit and Output: Evidence from French Banks

45 Pages Posted: 14 May 2013

See all articles by Jerome Coffinet

Jerome Coffinet

Banque de France

Virginie Coudert

Banque de France

Adrian Pop

Université d'Orléans

Cyril Pouvelle

Banque de France

Date Written: February 1, 2011

Abstract

We assess the extent to which capital buffers (the capital banks hold in excess of the regulatory minimum) exacerbate rather than reduce the cyclical behavior of credit. We empirically study the relationships between output gap, capital buffers and loan growth with firm-level data for French banks over the period 1993-2009. Our findings reveal that bank capital buffers intensify the cyclical credit fluctuations arising from the output gap developments, all the more as better quality capital is considered. Moreover, by performing Granger causality tests at the bank level, we find evidence of a two-way causality between capital buffers and loan growth, pointing to mutually reinforcing mechanisms. Overall, those empirical results lend support to a counter-cyclical financial regulation that focuses on highest-quality capital and aims at smoothing loan growth.

Keywords: Bank Capital Regulation, Procyclicality, Capital Buffers, Business Cycle Fluctuations, Basel III

JEL Classification: G28, G21

Suggested Citation

Coffinet, Jerome and Coudert, Virginie and Pop, Adrian and Pouvelle, Cyril, Two-Way Interplays between Capital Buffers, Credit and Output: Evidence from French Banks (February 1, 2011). Banque de France Working Paper No. 316, Available at SSRN: https://ssrn.com/abstract=1761965 or http://dx.doi.org/10.2139/ssrn.1761965

Jerome Coffinet (Contact Author)

Banque de France ( email )

Paris
France

Virginie Coudert

Banque de France ( email )

Paris
France

Adrian Pop

Université d'Orléans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

Cyril Pouvelle

Banque de France ( email )

Paris
France

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