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Usability of Bank Capital Buffers: The Role of Market Expectations
Author:
José Abad
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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 021
Language:
English
Publication Date:
28 Jan 2022
DOI:
https://doi.org/10.5089/9781616358938.001
ISBN:
9781616358938
ISSN:
1018-5941
Pages:
61
Keywords:
Capital Buffers; Basel III; Capital Regulation; Financial Institutions; Macropru; valuation model; buffer Usability; market expectation; bank Capital Structure; capital shortfall; Countercyclical capital buffers; Correspondent banking; Loans; Market capitalization; COVID-19; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund