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Implications of Corporate Capital Structure Theory for Banking Institutions

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  • Yair E. Orgler
  • Robert A. Taggart, Jr.
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    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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    File URL: http://www.nber.org/papers/w0737.pdf
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    Bibliographic Info

    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: Aug 1981
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    Publication status: published as Orgler, Yair E. and Robert A. Taggart, Jr. "Implications of Corporate Capital Structure Theory for Banking Institutions." Journal of Money, Credit and Banking, Vol. 15, No. 2 (May 1983), pp.212-221.
    Handle: RePEc:nbr:nberwo:0737

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    1. Thomas F. Cargill & Thomas Mayer, 1992. "U.S. Deposit Insurance Reform," Contemporary Economic Policy, Western Economic Association International, vol. 10(3), pages 95-103, 07.
    2. 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.
    3. 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.
    4. Pringle, John J, 1974. "The Capital Decision in Commercial Banks," Journal of Finance, American Finance Association, vol. 29(3), pages 779-95, June.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
    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.
    11. 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.
    12. 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..
    13. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
    14. Mingo, John J, 1975. "Regulatory Influence on Bank Capital Investment," Journal of Finance, American Finance Association, vol. 30(4), pages 1111-21, September.
    15. 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.
    16. 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.
    17. 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.
    18. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    19. Miller, Merton H. & Scholes, Myron S., 1978. "Dividends and taxes," Journal of Financial Economics, Elsevier, vol. 6(4), pages 333-364, December.
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    Cited by:
    1. 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.
    2. Demirguc-Kunt, Asli, 1992. "Creditor country regulations and commercial bank lending to developing countries," Policy Research Working Paper Series 917, The World Bank.
    3. 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.
    4. 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.
    5. Jacques, Kevin & Nigro, Peter, 1997. "Risk-based capital, portfolio risk, and bank capital: A simultaneous equations approach," Journal of Economics and Business, Elsevier, vol. 49(6), pages 533-547.
    6. Guizani, Brahim, 2010. "Regulation Policy And Credit Crunch: Evidence From Japan," MPRA Paper 46827, University Library of Munich, Germany, revised 08 May 2013.
    7. Larry D. Wall & David R. Peterson, 1994. "Bank holding company capital targets in the early 1990s: the regulators versus the markets," Working Paper 94-11, Federal Reserve Bank of Atlanta.
    8. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2013. "Excess control rights, bank capital structure adjustment and lending," Working Papers hal-00967892, HAL.
    9. Joseph G. Haubrich & James B. Thomson, 1994. "Loan sales: Pacific Rim trade in nontradable assets," Working Paper 9414, Federal Reserve Bank of Cleveland.
    10. Haubrich, Joseph G & Thomson, James B, 1996. " Loan Sales, Implicit Contracts, and Bank Structure," Review of Quantitative Finance and Accounting, Springer, vol. 7(2), pages 137-62, September.
    11. 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.
    12. Jokipii, Terhi & Milne, Alistair, 2011. "Bank capital buffer and risk adjustment decisions," Journal of Financial Stability, Elsevier, vol. 7(3), pages 165-178, August.
    13. 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.
    14. Barrios, Victor E. & Blanco, Juan M., 2003. "The effectiveness of bank capital adequacy regulation: A theoretical and empirical approach," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 1935-1958, October.
    15. 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.
    16. 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.
    17. Paul S. Calem & James R. Follain, 2003. "The asset-correlation parameter in Basel II for mortgages on single-family residences," Basel II White Paper 5, Board of Governors of the Federal Reserve System (U.S.).
    18. 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.

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