Narrow Results

This paper revisited the relationship between capital buffers and risk adjustments by showing the impact of the business cycle. Empirically, we used an unbalanced panel dataset from 426 banks of the BRIC countries (i.e., Brazil, Russia, India, and China) for the period 2007–2016. By using the two-step system GMM (2GMM), this study shows the results as: (i) capital buffers of Russia, India, and China behave counter-cyclically while it is pro-cyclical for Brazilian banks over the business cycle; (ii) in BRIC’s economy, credit risk, and bank financial stability is related to business cycle in counter and pro-cyclical fashion, respectively; (iii) capital buffers adjustment speed is the premier in China and India, shining banks accessibility to capital refill is much easier to Brazil and Russia. The adjustment speed is heterogeneous across countries; and (iv) financial stability in apex for the Chinese, Russian, and Indian banks apart from the Brazilian banks.

The capital buffer concept for banks misses its target: The capital buffers do not harm financial stability. However, they do not make a positive contribution either. Based on sobering practical experience, an alternative capital buffer concept has been developed. What is striking is that capital buffers for a bank no longer consist of seven components. Instead, the capital buffer consists of only two components: a resilience buffer and a sustainability buffer. The alternative capital buffer concept is effective in generating sufficient financial stability. It is not per se about higher capital buffers for banks. Instead, simple and transparent handling is highly beneficial to both banks and supervisors. However, this simple handling requires comprehensive analyses of systemic risks. Stress tests have an essential role to play here.