Are capital buffers pro-cyclical?: Evidence from Spanish panel data

We estimate the relationship between the Spanish business cycle and the capital buffers held by Spanish commercial and savings banks in an incomplete panel of institutions covering the period 1986-2000, which comprises a complete cycle. After controlling for other potential determinants of the surplus capital we find a robustly significant negative relationship between the position in the cycle and capital buffers. From a quantitative standpoint, an increase of 1 percentage point in GDP growth might reduce capital buffers by 17%. This relationship is, moreover, asymmetric, being closer during upturns. (C) 2003 Elsevier Inc. All rights reserved.