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How do banks adjust their capital ratios?

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  • Memmel, Christoph
  • Raupach, Peter

Abstract

We analyze the dynamics of banks' regulatory capital ratios. Using monthly regulatory data of large German banks, we estimate the target level and the adjustment speed of the capital ratio for each bank separately. There exists a target level for a substantial percentage of banks. Unlike with panel regressions, we can estimate individual adjustment speeds and find large variation across banks. Adjustments on the liability side are most effective, although adjustment rates on the asset side are higher. Private commercial banks (neither state-owned nor cooperative) and banks with a high level of proprietary trading are more likely to adjust their capital ratio tightly. Banks with a target capital ratio compensate for low target ratios with low asset volatilities and high adjustment speeds. They seem to care mainly about the resulting probability to comply with the regulatory minimum. Assuming low variation of this probability explains most of the large cross-sectional variation of bank capital.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 19 (2010)
Issue (Month): 4 (October)
Pages: 509-528

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Handle: RePEc:eee:jfinin:v:19:y:2010:i:4:p:509-528

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Web page: http://www.elsevier.com/locate/inca/622875

Related research

Keywords: G21 G32 Regulatory bank capital Target capital ratio Partial adjustment;

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References

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Citations

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Cited by:
  1. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2012. "Bank Regulatory Capital Adjustment and Ultimate Ownership Structure: Evidence from European Commercial Banks," Working Papers hal-00918577, HAL.
  2. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2013. "Excess control rights, bank capital structure adjustment and lending," Working Papers hal-00967892, HAL.
  3. Scott Roger & Jan Vlcek, 2011. "Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements," IMF Working Papers 11/103, International Monetary Fund.
  4. Maurin, Laurent & Toivanen, Mervi, 2012. "Risk, capital buffer and bank lending: a granular approach to the adjustment of euro area banks," Working Paper Series 1499, European Central Bank.
  5. A. Baglioni & E. Beccalli & A. Boitani & A. Monticini, 2013. "Is the leverage of European banks procyclical?," Empirical Economics, Springer, vol. 45(3), pages 1251-1266, December.
  6. von Furstenberg, George M., 2011. "Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue?," Discussion Paper Series 2: Banking and Financial Studies 2011,01, Deutsche Bundesbank, Research Centre.
  7. Jiang Cheng & Mary A. Weiss, 2011. "The Regulatory Effect of Risk-Based Capital in Property-Liability Insurance," NFI Working Papers 2011-WP-20, Indiana State University, Scott College of Business, Networks Financial Institute.
  8. Wahyoe Soedarmono & Philippe Rous & Amine Tarazi, 2011. "Bank Capital and Self-Interested Managers: Evidence from Indonesia," Working Papers hal-00918584, HAL.
  9. Fiordelisi, Franco & Marques-Ibanez, David & Molyneux, Phil, 2011. "Efficiency and risk in European banking," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1315-1326, May.
  10. Kok, Christoffer & Schepens, Glenn, 2013. "Bank reactions after capital shortfalls," Working Paper Series 1611, European Central Bank.
  11. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2012. "Ultimate Ownership Structure and Bank Regulatory Capital Adjustment: Evidence from European Commercial Banks," Working Papers hal-00918579, HAL.

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