ABSTRACT. This paper investigates the impact of the business cycle, adjustment costs and other bank specific variables on bank capital buffer in the three types of Indian commercial banks. This study specifies a partial adjustment model and uses the dynamic panel data model and more specifically the Generalized Method of Moments Technique to examine the impact of the business cycle, adjustment costs and other bank specific variables for the determination of bank capital buffer. We find a robustly significant negative relationship between the business cycle and capital buffer for all the three types of commercial banks in India. The capital buffers of foreign banks react more strongly to the business cycle than the other banks. Adjustment costs have the greater impact on the bank capital buffer. pp. 110–127
JEL codes: G24, O16, E5
Keywords: adjustment costs, bank capital buffer, business cycle, output gap