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Bank capital and value in the cross section

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  • Hamid Mehran
  • Anjan Thakor

Abstract

We address two questions: (i) Are bank capital structure and value correlated in the cross section, and if so, how? (ii) If bank capital does affect bank value, how are the components of bank value affected by capital? We first develop a dynamic model with a dissipative cost of bank capital that is traded off against the benefits of capital: strengthened incentives for the bank to engage in value-enhancing loan monitoring and a higher probability of avoiding regulatory closure due to loan delinquencies. The model predicts that (i) the total value of the bank and its equity capital are positively correlated in the cross section, and (ii) the various components of bank value--the synergies among the bank's assets and liabilities and the net present value to the shareholders of investing capital in the bank--are also positively cross-sectionally related to bank capital. When we confront the predictions with the data on bank acquisitions, we find strong support. The results are robust to a variety of alternative explanations--growth prospects, desire to acquire toe-hold positions, desire of capital-starved acquirers to buy capital-rich targets, market timing, pecking order, the effect of banks with binding capital requirements, too-big-to-fail, target profitability, risk, and mechanical effects.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 390.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:390

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Keywords: Bank capital ; Bank assets;

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Cited by:
  1. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2012. "Do bank characteristics influence the effect of monetary policy on bank risk?," Economics Letters, Elsevier, vol. 117(1), pages 220-222.
  2. Arthur Petit-Romec, 2011. "L'intérêt d'un renforcement des fonds propres bancaires (et de mesures complémentaires) pour concilier stabilité financière, performance et bon fonctionnement des banques," Post-Print dumas-00643745, HAL.
  3. Pierre-Richard Agénor & K. Alper & Luiz A. Pereira da Silva, 2011. "Capital Regulation, Monetary Policy and Financial Stability," Working Papers Series 237, Central Bank of Brazil, Research Department.
  4. Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2009. "Capital requirements and business cycles with credit market imperfections," Policy Research Working Paper Series 5151, The World Bank.
  5. Thakor, Anjan & Mehran, Hamid & Acharya, Viral V., 2010. "Caught Between Scylla and Charybdis? Regulating Bank Leverage When There is Rent Seeking and Risk Shifting," Working paper 643, Regulation2point0.
  6. Yener Altunbas & Simone Manganelli & David Marques-Ibanez, 2012. "Bank Risk during the Financial Crisis: Do business models matter?," Working Papers 12003, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  7. Viral Acharya & Hamid Mehran & Til Schuermann & Anjan Thakor, 2011. "Robust capital regulation," Staff Reports 490, Federal Reserve Bank of New York.
  8. Michael Brei & Carlos Winograd, 2012. "Foreign banks, corporate strategy and financial stability: lessons from the river plate," PSE Working Papers halshs-00703738, HAL.
  9. Michael Brei & Carlos Winograd, 2012. "Foreign banks, corporate strategy and financial stability: lessons from the river plate," Working Papers halshs-00703738, HAL.
  10. repec:ecb:ecbwps:20111427 is not listed on IDEAS
  11. Admati, Anat R. & DeMarzo, Peter M. & Hellwig, Martin F. & Pfleiderer, Paul, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive," Research Papers 2065, Stanford University, Graduate School of Business.

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