The Cyclical Patterns of Capital Buffers: Evidence from Japanese Banks

This study explores the relationship between banks' choice of capital buffers and prevailing macroeconomic conditions. Considering the unique features of Japan's economy and diverse capital adequacy standards, I analyze the data of Japanese commercial banks from 2002 to 2012. I find a negative relationship between capital buffers and the phases of the business cycle, but a positive relationship for internationally active banks. The negative signs were larger in magnitude and of higher significance level when including crisis dummies. The findings suggest that the capital buffers of internationally active banks behave in a countercyclical manner; however, during crises, the capital buffer patterns became procyclical.