The cyclical behaviour of European bank capital buffers

Using an unbalanced panel of accounting data from 1997 to 2004 and controlling for individual bank costs and risk, we find capital buffers of the banks in the EU15 have a significant negative co-movement with the cycle. For banks in the accession countries there is significant positive co-movement. Capital buffers of commercial and savings banks, and of large banks, exhibit negative co-movement. Those of co-operative and smaller, banks exhibit positive co-movement. Speeds of adjustment are fairly slow. We interpret these results and discuss policy implications, noting that negative co-movement of capital buffers will exacerbate the pro-cyclical impact of Basel II. (C) 2007 Elsevier B.V. All rights reserved.