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Optimal capital, regulatory requirements and bank performance in times of crisis: Evidence from France

Author

Listed:
  • O. de Bandt
  • B. Camara
  • A. Maitre
  • P. Pessarossi
Abstract
The recent implementation of the Basel III framework has re-ignited the debate around the link between capital, performance and capital requirements in the banking sector. There is a dominant view in the earlier empirical literature in favor of a positive effect of capital on banking performance. Using panel data gathered for the supervision of French banks, we also find evidence of the beneficial effect of higher capital, but try to go one step further by distinguishing between regulatory and voluntary capital. Using a two-step estimation procedure, taking advantage of the variability of data since the crisis, and controlling for many factors (risk, asset composition, etc), we show that voluntary capital, i.e. capital held by banks irrespective of their regulatory requirements, turns out to be the sole component of capital that positively affects performance, as measured by the return on asset (ROA). In contrast, the effect of regulatory capital on the ROA appears insignificant, indicating that over the 2007-2014 period increasing capital requirements have not been detrimental to banking performance in France.

Suggested Citation

  • O. de Bandt & B. Camara & A. Maitre & P. Pessarossi, 2016. "Optimal capital, regulatory requirements and bank performance in times of crisis: Evidence from France," Débats économiques et financiers 24, Banque de France.
    • Handle: RePEc:bfr:decfin:24
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    3. Stéphane Loisel, 2014. "Reevaluation of the capital charge in insurance after a large shock: empirical and theoretical views," Post-Print hal-02013669, HAL.
    4. Cyril Pouvelle., 2022. "An Analysis of Financial Conglomerate Resilience: A Perspective on bancassurance in France [Une analyse de la résilience des conglomérats financiers : Une perspective sur la bancassurance en France," Débats économiques et financiers 39, Banque de France.
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    8. Golbabaei, Ali & Botshekan, Mahmoud, 2022. "The capital ratio and the interest rate spread: A panel threshold regression approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 289-302.
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    11. J. Hombert & V. Lyonnet, 2017. "Intergenerational Risk Sharing in Life Insurance: Evidence from France," Débats économiques et financiers 30, Banque de France.
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    More about this item

    Keywords

    Bank capital; Performance; ROA; Capital requirements; Financial crisis.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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