Cyclical behavior of German banks' capital resources and the countercyclical buffer of Basel III

- We examine the cyclicality of economic capital of German banks.
- We observe a pro-cyclical behavior.
- We observe a lag of several months in the capital buffer adjustment.

Cyclical behavior of banks is one of the concerns that the Basel Committee of Banking Supervision has addressed in its new Basel III framework. Especially the 'countercyclical buffer' aims at the mitigation of the supposedly detrimental behavior of bank capital. The literature commonly assesses a pro-cyclical behavior of banks' excess capital but is analyzing mostly annual data using GDP as a proxy for the business cycle. With our aggregated monthly data we can detect a certain pro-cyclical behavior of German banks' capital, although only with a delay of several months.