Bank Capitalization and Cost: Evidence of Scale Economies in Risk Management and Signaling
AbstractWe amend the standard cost model to account for the role of financial capital in banking. The cost function is conditioned on the level of capital, but we model the demand for financial capital so that it can serve as a cushion against insolvency for potentially risk-averse managers and as a signal of risk for less informed outsiders. Scale economies are then computed without assuming that the bank chooses a level of capitalization that minimizes cost. We find evidence of substantial scale economies and that bank managers are risk averse and use the level of financial capital to signal the level of risk. Â© 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199601.
Date of creation: 03 Feb 1997
Date of revision:
Contact details of provider:
Postal: New Jersey Hall - 75 Hamilton Street, New Brunswick, NJ 08901-1248
Phone: (732) 932-7482
Fax: (732) 932-7416
Web page: http://snde.rutgers.edu/Rutgers/wp/rutgers-wplist.html
More information through EDIRC
Other versions of this item:
- Joseph P. Hughes & Loretta J. Mester, 1998. "Bank Capitalization And Cost: Evidence Of Scale Economies In Risk Management And Signaling," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 314-325, May.
- Joseph P. Hughes & Loretta J. Mester, 1997. "Bank capitalization and cost: evidence of scale economies in risk management and signaling," Working Papers 96-2, Federal Reserve Bank of Philadelphia.
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.:
- Loretta J. Mester, 1994. "How efficient are Third District banks?," Business Review, Federal Reserve Bank of Philadelphia, issue Jan, pages 3-18.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.