What are banks' actual capital targets? Lessons for policymakers

This paper investigates capital ratio targets announced by large banks in the euro area. It provides the following key lessons. First, those targets are affected by capital requirements and procyclical behavior consistent with market pressure. Second, banks do not distinguish between the different types of capital requirements for setting their targets, suggesting impeded usability of the prudential buffers. Third, the distance between actual CET1 ratio and the target is a valuable predictor of future balance-sheet adjustment, suggesting that banks actively drive their capital ratio toward their announced target, through capital accumulation and portfolio rebalancing. Fourth, this adjustment occurs both above and below targets, but banks below targets adjust faster, suggesting stronger pressure. Those results provide important lessons for policymakers regarding the design of the prudential framework and the effciency of countercyclical policies.