Paper ID: 10316 Are Bank Capital Buffers Cyclical – Evidence for Developed and Developing Countries

This study examines the relationship between bank capital (common equity) buffers and business cycle fluctuations. Furthermore, this study examines whether the behavior of bank capital (common equity) buffers is different based on the economic development, financial system, bank types and bank size. This study employs an unbalanced panel data from 1995 to 2009, including total 171 countries. The empirical results show that the negative relationship between capital buffers and business cycle. However, common equity buffers are positively correlated with business cycle in the samples of global countries, developed countries, and market-base countries. The capital buffers and common equity buffers both are negatively related to business cycle in the samples of the developing counties. This study further investigates the relationship between Tier 2 ratio and business cycle, and the results report that the Tier 2 ratio will rise during the recession. This finding implies banks may use Tier 2 to manipulate the estimation of the capital adequacy ratio