Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/154044 
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper No. 1611
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper investigates whether European banks have capital targets and how deviations from the target impact their equity composition and activity mix. Using quarterly data for a sample of large European banks between 2004 and 2011, we show that there are notable asymmetries in banks' reactions to deviations from optimal capital levels. Banks prefer to reshuffle risk-weighted assets or increase asset holdings when being above their optimal Tier 1 ratio, whereas they rather try to increase equity levels or reshuffle risk-weighted assets without changing asset holdings when being below target. At the same time, focusing instead on a unweighted equity ratio target, we find evidence of deleveraging and lower loan growth for undercapitalized banks during the recent financial crisis, whereas in the pre-crisis periods banks primarily reacted to deviations from their optimal target by adjusting equity levels.
Subjects: 
bank capital optimisation
banking
capital structure
deleveraging
financial regulation
JEL: 
D22
E44
G20
G21
G28
Document Type: 
Working Paper

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