Quality versus Quantity: The Case of U.S. Bank Capital Buffers

Abstract

We find that larger US bank holding companies (BHCs) hold lower quality capital buffers than their smaller peers. US BHCs’ capital buffer quality is found to be a function of their operational complexity, risk-weighted assets and profitability. We, however, find no evidence that large US BHCs trade–off capital buffer quality with their liquid asset investments. On average, US BHCs narrow the gap between their actual and target buffer quality by 49.5 per cent per quarter. This (buffer quality) adjustment speed, however, is substantially faster than that observed in pre-GFC US studies of buffer size. The well capitalised US BHCs (top 20 percent) adjust their buffer quality 8 percent faster than poorly capitalised ones. The latter seem to face impediments in raising new capital due to higher reputation costs. The costs of adjusting buffers also seem an important explanation for holding higher quality buffers. Our results shed more light on the trade-offs associated with banks holding higher quality capital buffers.