Edited by Kern Alexander and Rahul Dhumale
Chapter 4: The Determinants of Capital Held by UK Banks and Building Societies and the Role of Individual Capital Requirements
Isaac Alfon, Isabel Argimon and Patricia Bascuñana-Ambrós1 Editors’ abstract: Dr Isaac Alfon, Dr Isabel Argimon, and Patricia Bascuñana-Ambrós examine some of the important influences that cause banks to hold regulatory capital in excess of the minimum requirements. They review hypotheses about how decisions on capital are taken and how they affect the ‘buffer’ between actual capital and the regulatory capital requirement. The hypotheses come from the literature and from discussion with policy makers, supervisors and practitioners. They argue that the amount of capital held by banks and building societies depends on risk management, market discipline and regulatory capital requirements. Although the data derive from UK banks and building societies in the late 1990s and early 2000s, the analysis is equally applicable in today’s Basel III environment that gives bank supervisors discretion to adjust capital requirements under the Pillar 2 supervisory review process. Using both quantitative and qualitative approaches, they provide evidence on which their hypotheses hold for UK banks and building societies: that although regulatory requirements affect the amount of capital held by banks and building societies, so do risk management practices and market discipline. INTRODUCTION Most UK banks and building societies2 hold considerably more capital than required by the regulator. This might lead one to assume that changes in capital requirements do not affect the amount of capital held by firms, as the changes will be fully absorbed by this excess or buffer. However, the amount of capital held by firms is influenced by many...
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