Does banks’ systemic importance affect their capital structure and balance sheet adjustment processes? National Bank of Belgium, Working Paper No. 369

Bakkar, Yassine and De Jonghe, Olivier and Tarazi, Amine (2019) Does banks’ systemic importance affect their capital structure and balance sheet adjustment processes? National Bank of Belgium, Working Paper No. 369. [Working Paper]

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Abstract

Frictions prevent banks to immediately adjust their capital ratio towards their desired and/or imposed level. This paper analyzes (i) whether or not these frictions are larger for regulatory capital ratios vis-à-vis a plain leverage ratio; (ii) which adjustment channels banks use to adjust their capital ratio; and (iii) how the speed of adjustment and adjustment channels differ between large, systemic and complex banks versus small banks. Our results, obtained using a sample of listed banks across OECD countries for the 2001-2012 period, bear critical policy implications for the implementation of new (systemic risk-based) capital requirements and their impact on banks’ balance sheets, specifically lending, and hence the real economy.

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