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US banks' capitalization speed‐of‐adjustment: a microeconometric approach

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  • Konstantinos Drakos

Abstract

Purpose - The purpose of this paper is to investigate whether there are any differences in the capitalization speed‐of‐adjustment across regulatory capitalization buckets of commercial banks in the USA, for the period 2002‐2009. Design/methodology/approach - The Federal Deposit Insurance Corporation (FDIC) monitors banks' capital ratio using the bucketing approach. Thus, this discrete and ordered variable is modeled in the context of a partial adjustment specification, controlling for initial conditions and cross‐sectional heterogeneity. Parameters are estimated with the generalized dynamic random effects ordered probit technique that is flexible enough to allow for differential effects of covariates across capitalization categories. Findings - The main result is that the speed of adjustment is monotonically increasing for banks belonging in lower capitalization buckets, after controlling for bank‐specific capitalization determinants. In addition, substantial differential impacts of capitalization drivers across regulatory buckets are uncovered. Practical implications - This an important finding both for regulators and market participants since it sheds light on a very crucial aspect of banks' behaviour. Originality/value - This is the first paper that adopts the FDIC bucketing in the actual modelling. In addition, it uses the generalized dynamic random effects ordered probit technique in order to explore potential differential impact of capital ratio determinants across buckets.

Suggested Citation

  • Konstantinos Drakos, 2012. "US banks' capitalization speed‐of‐adjustment: a microeconometric approach," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(3), pages 270-286, July.
    • Handle: RePEc:eme:jfeppp:v:4:y:2012:i:3:p:270-286
    DOI: 10.1108/17576381211245980
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