Cyclicality of Capital Adequacy Ratios in Heterogeneous Environment: a Non-linear Panel Smooth Transition Regression Explanation

Ghulame Rubbaniy
Ali Awais Cheema
Stathis PolyzosFollow

Document Type

Article

Source of Publication

SSRN Electronic Journal

Publication Date

1-1-2020

Abstract

This study aims to investigate the cyclicality of capital adequacy ratios (CARs) in US bank holding companies using a new business cycle index and a non-linear panel smooth transition regression model. The suggested index can predict US business activity with a higher accuracy than existing proxies, while the regression methodology deals with the heterogeneity bias of linear models and can capture asymmetric effects, thus improving forecasting efficiency. Our results show that the equity capital to assets ratio is countercyclical, while the risk-based capital adequacy ratios are procyclical. In addition, the response of capital adequacy ratios to changes in economic activity is asymmetric across recessions and expansions. The findings of this study can assist policymakers and bank regulators as the estimation of capital adequacy ratios using the non-linear method and new proxy of BC can improve both the time-lag and accuracy issues in the regulators’ decision making and results in improved compliance behavior of the banks.

ISSN

1556-5068

Publisher

Elsevier BV

Disciplines

Business

Indexed in Scopus

no

Open Access

yes

Open Access Type

Green: A manuscript of this publication is openly available in a repository

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