The determinants of Brazilian banks’ capital buffers

Abstract

This paper follows the theoretic model developed by Estrella (2004) in which banks maintain equity capital to reduce the adjustment cost of capital. We claim that excess capital of banks is determined by the risk level of assets and cost of debts. In order to test these hypotheses for the Brazilian banking industry, we estimate a dynamic panel data model with 68 financial clusters in the period from 2000 to 2008. The econometric model includes some control variables to measure the behavior of the excess capital during the business cycle and to analyze the role of the financial intermediaries’ profile (size and capital control) in their capitalization policies. Our results indicate that there is persistence in the adjustment process of the excess capital in the Brazilian financial system, suggesting that there are costs to adjusting capital.