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

Authors: Serge Valant Gandja

Addresses: Kedge Business School, 680 cours de la Libération 33405 – Talence Cedex, France

Abstract: 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.

Keywords: equity; regulatory capital; shock transmission; bank balance sheets; error correction model; ECM; capital levels; bank reactions; financial crises; economic activities; Europe; bank behaviour; principal component analysis; PCA; macroeconomic indicators.

DOI: 10.1504/IJCA.2015.070461

International Journal of Critical Accounting, 2015 Vol.7 No.3, pp.260 - 275

Available online: 07 Jul 2015 *

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