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What Caused the Bank Capital Build-up of the 1990s?

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  • Mark J. Flannery
  • Kasturi P. Rangan

Abstract

Large U.S. banks dramatically increased their capitalization during the 1990s, to the highest levels in more than 50 years. We document this buildup of capital and evaluate several potential motivations. Our results support the hypothesis that regulatory innovations in the early 1990s weakened conjectural government guarantees and enhanced bank counterparties' incentives to monitor and price default risk. We find no evidence that a bank holding company's (BHC's) market capitalization increases with its asset volatility prior to 1994. Thereafter, the data display a strong cross-sectional relation between capitalization and asset risk. Copyright 2008, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 12 (2008)
Issue (Month): 2 ()
Pages: 391-429

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Handle: RePEc:oup:revfin:v:12:y:2008:i:2:p:391-429

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Cited by:
  1. Fred Furlong & Simon Kwan, 2006. "Safe and sound banking, 20 years later: what was proposed and what has been adopted," Working Paper Series 2006-27, Federal Reserve Bank of San Francisco.
  2. Di Nicolo, G. & Gamba, A. & Lucchetta, M., 2011. "Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking," Discussion Paper 2011-090, Tilburg University, Center for Economic Research.
  3. Jose M. Berrospide & Rochelle M. Edge, 2010. "The effects of bank capital on lending: What do we know, and what does it mean?," CAMA Working Papers 2010-26, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  4. Pathan, Shams, 2009. "Strong boards, CEO power and bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1340-1350, July.
  5. Thomas F. Cosimano & Dalia Hakura, 2011. "Bank Behavior in Response to Basel III: A Cross-Country Analysis," IMF Working Papers 11/119, International Monetary Fund.
  6. L. Baele & V. De Bruyckere & O. De Jonghe & R. Vander Vennet, 2012. "Do Stock Markets Discipline US Bank Holding Companies: Just Monitoring, or also In‡uencing?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 12/827, Ghent University, Faculty of Economics and Business Administration.
  7. Frederick T. Furlong & Simon Kwan, 2006. "Safe & sound banking, 20 years later: what was proposed and what has been adopted," Proceedings, Federal Reserve Bank of San Francisco.
  8. Chen, Sichong, 2011. "Capital ratios and the cross-section of bank stock returns: Evidence from Japan," Journal of Asian Economics, Elsevier, vol. 22(2), pages 99-114, April.
  9. Allen Berger & Robert DeYoung & Mark Flannery & David Lee & Ozde Oztekin, 2008. "How do large banking organizations manage their capital ratio?," Research Working Paper RWP 08-01, Federal Reserve Bank of Kansas City.
  10. Hamid Mehran & Joshua Rosenberg, 2007. "The effect of employee stock options on bank investment choice, borrowing, and capital," Staff Reports 305, Federal Reserve Bank of New York.
  11. Christoffer Kok Sørensen & Jung-Duk Lichtenberger, 2007. "Mortage interest rate dispersion in the euro area," Working Paper Series 733, European Central Bank.
  12. Uhde, André & Heimeshoff, Ulrich, 2009. "Consolidation in banking and financial stability in Europe: empirical evidence," IWQW Discussion Paper Series 02/2009, Friedrich-Alexander-Universität Erlangen-Nürnberg, Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW).
  13. Delis, Manthos D & Staikouras, Panagiotis & Tsoumas, Chris, 2013. "Enforcement actions and bank behavior," MPRA Paper 43557, University Library of Munich, Germany.
  14. Fonseca, Ana Rosa & González, Francisco, 2010. "How bank capital buffers vary across countries: The influence of cost of deposits, market power and bank regulation," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 892-902, April.
  15. Abel Elizalde & Rafael Repullo, 2007. "Economic and Regulatory Capital in Banking: What Is the Difference?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 87-117, September.

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