The Nexus Between Underlying Dynamics of Bank Capital Buffer and Performance

Abstract

This paper reveals the underlying dynamics between the capital buffer and bank performance in EU-27 countries. A dynamic panel analysis shows that capital buffer is significantly affected by bank performance and risk exposure. Remarkably, a threshold analysis identifies regime changes for the underlying relationships during the financial crisis of 2008. We find a positive relationship between the capital buffer and performance for banks that fall in the low performance regime, while a negative relationship is reported for the banks that belong to the high regime. Threshold results also show that buffer exerts a positive impact on bank performance. Although regulation reforms that aim to raise the capital requirements could improve bank performance and stability, these improvements are not homogeneous across banks.

Basel IV capital requirements and the performance of commercial banks in Africa

“…Since large (Isize 4 and Isize 5) banks had no significant impact on performance under Basel II, it would be expected for the large size banks not to significantly impact performance for higher Basel level. According to [57], large banks tend to hold low capital buffers and as consequently higher CAR results in drop in the large banks' capital ratios, which may affect the returns on equity. Secondly, Basel III and IV require an increase in equity capital, and as a result, many banks in Africa may struggle to access capital from the capital market.…”