The Behavior of Australian Banks’ Capital Buffers: Pro- or Counter-Cyclical?

Abstract

This paper investigates the behavior of capital buffers of Australian banks to changes in the business cycle. More particularly, whether there is a behavioral difference between big and small banks, and whether the 2008-09 global financial crisis influenced bank behavior with respect to capital buffers. Applying the Generalized Method of Moments technique, we find the evidence to support pro-cyclical behavior of large banks, but counter-cyclical of small banks. Our results also show that banks with large size, large risky portfolio, and high lending growth rate tend to hold less capital than their peers. Finally, our results suggest that the latest financial crisis did induce banks to hold more capital.