How Do Capital Buffers Respond to Basel? An Empirical Analysis of the Brazilian Banking System

Informações

Código: FIN3078
Divisão: FIN - Finanças
Tema de Interesse: Tema 05 - Mercados e Instituições Financeiras

Autores

João Andre Calvino Marques Pereira, Richard Saito

Resumo

Despite banks’ key role in allowing an efficient resources allocation in the economy,they also inherently carry a fragility and opacity that may cause instability to the financialsystem with high costs to society. For those reasons, the banking industry is heavily regulated.Particularly, the capital regulation requires from the banker a minimum participation in thebusiness which is proportional to the risk of the firm’s investments, in order to minimizeopportunistic behavior and make the bank safer against shocks on the value of its assets. Thebanker, in turn, generally chooses his stake so as to maintain a safety margin over theregulatory capital limit and, at the same time, meeting the expectations and pressures from themarket. Thus, beyond the regulatory constraint, some other factors may influence thecombination between the banking structures of capital and investments.We empirically examine the main determinants of the capital buffer management(capital exceeding the minimum required by regulation) for the Brazilian banking industry, inorder to test whether banks respond to the previous and new fundamentals of capitalregulation.Specifically, those previous fundamentals are defined in the Basel II structure as thethree pillars of regulation: Pillar 1, which deals with capital requirement models and bankscapital/risk management; Pillar 2, approaching the supervisory monitoring; and Pillar 3,which deals with the market discipline. And the last one has been included in the last versionof the Basel Accord following the recent 2008, and it is defined as the banks’ capitalmanagement cyclical behavior.We structure the empirical problem as a dynamic unbalanced panel with fixed effectson the basis of the capital buffer theory, and estimate the regressions through the systemgeneralized method of moments. The data base consists of quarterly information from bankssolo and banking holding companies with commercial portfolios, operating in Brazil in theperiod between the first quarter of 2001 and the fourth quarter of 2009.We find evidence that regulatory capital requirements may influence banks behavior,since those with more volatile earnings and higher adjustments costs may decide to holdhigher capital buffers. We also find that banks may follow a pecking order when decidingtheir capital levels, and larger banks present lower levels of capital ratios, which may berelated to too-big-to-fail issues. Moreover, we provide evidence that: (i) Central Banksupervision exerts positive pressure on bank’s decision; (ii) market discipline may play aminor role in driving capital ratios; and (iii) the business cycle has a negative impact onbank’s capital cushion, suggesting a pro-cyclical behavior of capital management. The resultscontribute to the discussion of the implementation in Brazil of the macro-prudentialregulatory policies discussed in the Basel Committee.

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