Capital Buffer in The Presence of Market Structure and Business Cycle: An Assessment

Abstract

The primary aim of this paper is to check the influence of business cycles and market structure on capital buffers after the implementation of the Basel Accords. To achieve the objective of this study, we considered 34 Pakistani commercial banks over the period from 2006 to 2017 by adopting the two-step system Generalized Method of Moment estimation technique. The empirical findings for the whole period suggest that the impact influence of the business cycle (output gap) on the capital buffer is found to be pro-cyclical. However, when we examined the behavior of the business cycle on the capital buffer in the post-Basel-II period, the sign of output gaps turns to be positive (counter-cyclical). Furthermore, it is important that market structure influence a negative impact on the capital buffer, which indicated that the banks do not take the excessive risk for increasing their profit, so they reduced their level of the capital buffer.