Banks’ buffer capital: How important is risk?

Most banks hold a capital to asset ratio well above the required minimum 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 are analysed. Focus is on the importance of: (i) risk, particularly credit risk, (ii) the buffer as an insurance, (iii) the competition effect, (iv) supervisory discipline, and (v) economic growth. A negative or nonsignificant risk effect is found, which suggests that introducing a more risk-sensitive capital regulation (Basel II) is likely to affect Norwegian banks. Support is found for the hypothesis that buffer capital serves as an insurance against failure to meet the capital requirements.Banking; Excess capital; Risk; Panel data