Banks and capital requirements: Channels of adjustment

Why bank capital matters for monetary policy

“…The downward trend in the first three panels of Figure 1 is more pronounced for risk-weighted capital ratios (the shaded area indicates the post-Lehman period). The fact that the risk-based leverage fell more strongly than the other leverage measures in response to the crisis suggests that banks could have invested in assets with lower risk weights, although there is evidence that banks from the advanced economies increased capital through equity issuance, cuts in dividends and increases in retained earnings (Cohen and Scatigna, 2014). As one can see from the last panel of Figure 1 the market-based leverage is much more volatile compared to the other accounting leverage ratios.…”

Risk Management and Regulation

“…The reform program has been successful in strengthening the financial system and supporting financial stability. And there is evidence suggesting that a well-capitalized banking system supports sustainable credit growth (Cohen and Scatigna 2014). It is nonetheless important that authorities carefully evaluate the impact of the substantial changes in financial regulation in response to the crisis, and stand ready to amend policies if major adverse unintended consequences are revealed.…”

Leverage Ratio and Central Bank Operations in the Euro Area

“…In order to investigate whether such over‐compliance with the (not yet mandatory) 3 per cent threshold might have affected monetary policy implementation, we start by measuring the relative contribution of capital and exposures to changes in the LR. We decompose changes in each bank's LR according to the following formula that adapts the one presented in Cohen and Scatigna (): where , K and TE denote Tier 1 capital and total exposure respectively.…”