Author : José Abad,Antonio I Garcia Pascual
Publisher : International Monetary Fund
Page : 61 pages
File Size : 54,5 Mb
Release : 2022-01-28
Category : Business & Economics
ISBN : 9781616358938
Usability of Bank Capital Buffers: The Role of Market Expectations by José Abad,Antonio I Garcia Pascual Pdf
Following the COVID shock, supervisors encouraged banks to use capital buffers to support the recovery. However, banks have been reluctant to do so. Provided the market expects a bank to rebuild its buffers, any draw-down will open up a capital shortfall that will weigh on its share price. Therefore, a bank will only decide to use its buffers if the value creation from a larger loan book offsets the costs associated with a capital shortfall. Using market expectations, we calibrate a framework for assessing the usability of buffers. Our results suggest that the cases in which the use of buffers make economic sense are rare in practice.