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The Effectiveness of Bank Capital Adequacy Requirements : A Theoretical and Empirical Approach

Author

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  • Barrios, Victor E.

    (Universidad de Valencia, Departamento de Analisis Economico)

  • Blanco, Juan M.

    (Universidad de Valencia, Departamento de Analisis Economico)

Abstract

The aim of this paper is to analyse how banking firms set their capital ratios, that is, the rate of equity capital over assets. In order to study this issue, two theoretical models are developed. Both models deal with the existence of an optimal capital ratio; the first one for firms not affected by capital adequacy regulation, the second one for firms which are. The models have been tested by estimating a disequilibrium model using data of Spanish savings banks.

Suggested Citation

  • Barrios, Victor E. & Blanco, Juan M., 2000. "The Effectiveness of Bank Capital Adequacy Requirements : A Theoretical and Empirical Approach," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001001, Universit√© catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2001001
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/2001-1.pdf
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    References listed on IDEAS

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    1. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-456, May.
    2. Keeley, Michael C. & Furlong, Frederick T., 1990. "A reexamination of mean-variance analysis of bank capital regulation," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 69-84, March.
    3. Maddala, G S & Nelson, Forrest D, 1974. "Maximum Likelihood Methods for Models of Markets in Disequilibrium," Econometrica, Econometric Society, vol. 42(6), pages 1013-1030, November.
    4. Mingo, John J, 1975. "Regulatory Influence on Bank Capital Investment," Journal of Finance, American Finance Association, vol. 30(4), pages 1111-1121, September.
    5. Dahl, Drew & Shrieves, Ronald E., 1991. "The impact of regulation on bank equity infusions," Journal of Banking & Finance, Elsevier, vol. 15(2), pages 467-468, April.
    6. Marcus, Alan J, 1983. " The Bank Capital Decision: A Time Series-Cross Section Analysis," Journal of Finance, American Finance Association, vol. 38(4), pages 1217-1232, September.
    7. Wall, Larry D. & Peterson, David R., 1987. "The effect of capital adequacy guidelines on large bank holding companies," Journal of Banking & Finance, Elsevier, vol. 11(4), pages 581-600, December.
    8. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-1233, December.
    9. Lam, Chun H & Chen, Andrew H, 1985. " Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments," Journal of Finance, American Finance Association, vol. 40(2), pages 563-575, June.
    10. 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 1267-1282, September.
    11. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
    12. Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 439-457, April.
    13. Rochet, Jean-Charles, 1992. "Capital requirements and the behaviour of commercial banks," European Economic Review, Elsevier, vol. 36(5), pages 1137-1170, June.
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    More about this item

    Keywords

    capital ratio; capital adequacy regulation; disequilibrium model;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models

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