Did the Czech and Slovak Banks Increase their Capital Ratios by Decreasing Risk, Increasing Capital or Both?

The average capital adequacy of Czech banks increased from 14.1% in 2009 to 17.1% in 2013. In the case of Slovak banks the figure increased even more, from 12.7% at end-2009 to 17.2% at end-2013. For the sample of the largest nine Czech and four Slovak banks we aim to identify the strategies that these banks adopted in order to increase their capital ratios. Our analysis shows that for Czech banks as with the large multi-national banks from advanced economies, increased capital has played a major role in increasing the average capital ratio. Slovak banks, in addition, significantly decreased their risk to strengthen the overall ratio. The results of our analysis are useful mainly from a regulatory point of view as in both the Czech Republic and Slovakia the countercyclical buffer is set to its minimum of 0% of risk-weighted assets and the national regulators may increase the buffer up to 2.5% in the medium or long term.