Capital levels, regulatory capital and banks' reaction: an analysis of the relationship by an error correction model

The heterogeneous reactions of the banks and the asymmetric impact of the 2007-2009 financial crises on the real activity highlighted a necessity to analyse the relationship between the bank balance-sheets and the economic activities in Europe. In this paper, the banks behaviour is evaluated across the capital levels and the components of the regulatory capital. The data is collected by a combination of the bank balance sheets. The data processing is conducted through the principal component analysis and the error correction model. The results indicate that the banks reaction is mainly dictated by the variables related to the performance and the macroeconomic indicators.