The Latin American bank capital buffers and business cycle: Are they pro-cyclical?

•Examine bank capital buffer fluctuations over the business cycle.•Examine 13 Latin American and Caribbean banking systems for the period 2001–2012.•Results suggest different cyclical patterns of capital buffers across countries.•Buffers fluctuate procyclically where costs of adjustment are lower.•Buffers fluctuate procyclically where capital regulation is less stringent.

This paper examines capital buffer fluctuations over the business cycle and provides empirical evidence on determinants of capital buffers for the banking sectors of 13 Latin American and Caribbean countries for the period 2001–2012. Results indicate that there is a negative and significant relationship between regulatory capital buffers and GDP growth for five countries, while positive and significant for six. Banks’ adjustment costs, size, profitability and risk are significant determinants of buffers holdings. We present evidence that capital buffers are more likely to fluctuate pro-cyclically in those countries where costs of adjustment are lower and capital regulation is less stringent.