1 (KGL) 12.3.03. Preliminary.

Most banks hold a capital to asset ratio well above the required minimum level defined by the present capital adequacy regulation (Basel I). Using bank-level panel data from Norway, important hypotheses concerning the determination of the buffer capital is tested. Focus is particularly on the importance of: (i) the buffer as an insurance, (ii) portfolio risk, (iii) the competition effect, (iv) regulatory monitoring, and (v) economic growth. The results imply that buffer capital is used both as an insurance against failure to meet the capital requirement and a competition parameter. A negative risk effect suggests that moral hazard is present, but increased regulatory scrutiny increases the buffer capital of commercial banks. The buffer capital of commercial banks behaves counter-cyclically