Banks and capital requirements: channels of adjustment

BIS Working Papers No 443
March 2014

Published in Journal of Banking and Finance, vol 29, supp 1, August 2016, pp S56-S69.

Bank capital ratios have increased steadily since the financial crisis. For a sample of 94 large banks from advanced and emerging economies, retained earnings account for the bulk of their higher risk-weighted capital ratios, with reductions in risk weights playing a lesser role. On average, banks continued to expand their lending, though lending growth was relatively slower among European banks. Lower dividend payouts and (for advanced economy banks) wider lending spreads have contributed to banks' ability to use retained earnings to build capital. Banks that came out of the crisis with higher capital ratios and stronger profitability were able to expand lending more.

JEL classification: E44, G21, G28

Keywords: banks, bank capital, regulation, capital ratios, Basel III