Abstract
Using annual data since 1834 and quarterly data since 1959, I find a negative correlation between aggregate output and the bank capital ratio, though the numbers are mostly small and insignificant, even when considering leads and lags. Somewhat stronger negative correlations arise with the Tier 1 to risk-weighted assets ratio. The most significant correlations tend to reflect movements in bank assets, rather than capital itself, and although the pattern of aggregate correlations matches that of large banks, small banks show a different pattern, with strongly pro-cyclical capital ratios.
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Notes
In this paper, “book capital ratio” or “capital ratio” means the ratio of book equity to total book assets. “Leverage” means the inverse of “capital ratio”; I use leverage when discussing references that speak in terms of leverage rather than capital ratios. “Leverage ratio” is synonymous with “capital ratio.” “Risk-based capital ratio” or “Tier 1 ratio” means the ratio of Tier 1 capital to risk-weighted assets, both as defined by regulators.
The working paper version of this paper includes results using the H-P filter. The results are qualitatively similar.
The Estrella (2004) model, one of the very few that consider leads and lags, predicts a similar pattern, but with the opposite sign.
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Acknowledgments
The views stated herein are those of the author, and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. I thank Tim Bianco, Tricia Waiwood, Tristan Young, George Nurisso and Rachel Widra for excellent research assistance, and Jon Moen and participants at the Western Economics Association annual meeting, the North American Summer Econometric Society meeting, the Michigan State University econometrics workshop, the University of Notre Dame, a joint economic history and macroeconomics workshop at Rutgers, particularly Hugh Rockoff, and Anna Kovner, two anonymous referees and the editor, Mark Carey, for comments. All errors remain mine.
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Haubrich, J.G. How Cyclical Is Bank Capital?. J Financ Serv Res 58, 27–38 (2020). https://doi.org/10.1007/s10693-019-00331-7
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DOI: https://doi.org/10.1007/s10693-019-00331-7