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Implications of Corporate Capital Structure Theory for Banking Institutions

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Author Info
Yair E. Orgler
Robert A. Taggart, Jr.
Abstract

This paper applies some recent advances in corporate capital structure theory to the determination of optimal capital in banking. The effects of corporate and personal taxes, government regulation, the technology of producing deposit services and the costs of bankruptcy and agency problems are all discussed in the context of the U.S. commercial banking system. The analysis suggests explanations for why commercial banks tend to have relatively less capital than nonfinancial firms, why commercial bank leverage has tended to increase over time and why large banks tend to have relatively less capital than small banks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0737.

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Date of creation: May 1983
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Handle: RePEc:nbr:nberwo:0737

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May. [Downloadable!] (restricted)
  2. Pringle, John J, 1974. "The Capital Decision in Commercial Banks," Journal of Finance, American Finance Association, vol. 29(3), pages 779-95, June. [Downloadable!] (restricted)
  3. Barnea, Amir & Haugen, Robert A & Senbet, Lemma W, 1981. "An Equilibrium Analysis of Debt Financing under Costly Tax Arbitrage and Agency Problems," Journal of Finance, American Finance Association, vol. 36(3), pages 569-81, June. [Downloadable!] (restricted)
  4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  5. Peltzman, Sam, 1970. "Capital Investment in Commercial Banking and Its Relationship to Portfolio Regulation," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 1-26, Jan.-Feb.. [Downloadable!] (restricted)
  6. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March. [Downloadable!] (restricted)
  7. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-22, September. [Downloadable!] (restricted)
  8. Taggart, Robert A, Jr & Greenbaum, Stuart I, 1978. "Bank Capital and Public Regulation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 158-69, May. [Downloadable!] (restricted)
  9. Mingo, John J, 1975. "Regulatory Influence on Bank Capital Investment," Journal of Finance, American Finance Association, vol. 30(4), pages 1111-21, September. [Downloadable!] (restricted)
  10. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March. [Downloadable!] (restricted)
  11. Miller, Merton H. & Scholes, Myron S., 1978. "Dividends and taxes," Journal of Financial Economics, Elsevier, vol. 6(4), pages 333-364, December. [Downloadable!] (restricted)
  12. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June. [Downloadable!] (restricted)
  13. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January. [Downloadable!] (restricted)
  14. Haugen, Robert A & Senbet, Lemma W, 1978. "The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 33(2), pages 383-93, May. [Downloadable!] (restricted)
  15. Santomero, Anthony M & Watson, Ronald D, 1977. "Determining an Optimal Capital Standard for the Banking Industry," Journal of Finance, American Finance Association, vol. 32(4), pages 1267-82, September. [Downloadable!] (restricted)
  16. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June. [Downloadable!] (restricted)
  17. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
  18. Robichek, Alexander A. & Myers, Stewart C., 1966. "Problems in the Theory of Optimal Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 1(02), pages 1-35, June. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Larry D. Wall & Pamela P. Peterson, 1998. "The choice of capital instruments," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-17. [Downloadable!]
  2. Kleff, Volker, 2005. "Capital policy of German savings banks : a survey," ZEW Discussion Papers 05-63, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  3. Joseph G. Haubrich & James B. Thomson, 1994. "Loan sales: Pacific Rim trade in nontradable assets," Working Paper 9414, Federal Reserve Bank of Cleveland. [Downloadable!]
  4. Paul Leonard & Rita Biswas, 1998. "The Impact of Regulatory Changes on the Risk-Taking Behavior of State Chartered Savings Banks," Journal of Financial Services Research, Springer, vol. 13(1), pages 37-69, February. [Downloadable!] (restricted)
  5. William P. Osterberg, 1990. "Bank capital requirements and leverage: a review of the literature," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 2-12. [Downloadable!]
  6. Larry D. Wall & Pamela P. Peterson, 1996. "Banks' responses to binding regulatory capital requirements," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 1-17. [Downloadable!]
  7. William P. Osterberg & James B. Thomson, 1990. "Optimal financial structure and bank capital requirements: an empirical investigation," Working Paper 9007, Federal Reserve Bank of Cleveland. [Downloadable!]
  8. Demirguc-Kunt, Asli, 1992. "Creditor country regulations and commercial bank lending to developing countries," Policy Research Working Paper Series 917, The World Bank. [Downloadable!]
  9. Patrick de Fontnouvelle & Victoria Garrity & Scott Chu & Eric Rosengren, 2005. "The potential impact of explicit Basel II operational risk capital charges on the competitive environment of processing banks in the United States," Basel II White Paper 5, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Weber, Martin & Kleff, Volker, 2003. "How Do Banks Determine Capital? : Empirical Evidence for Germany," ZEW Discussion Papers 03-66, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  11. Joseph G. Haubrich & James B. Thomson, 1993. "Loan sales, implicit contracts, and bank structure," Working Paper 9307, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  12. Andrew Winton, 1999. "Don’t Put All Your Eggs in One Basket? Diversification and Specialization in Lending," Center for Financial Institutions Working Papers 00-16, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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