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Optimal financial structure and bank capital requirements: an empirical investigation

  • William P. Osterberg
  • James B. Thomson

This paper presents an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book value of liabilities' and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987. Many theoretical models of bank behavior assume that bank capital requirements will be binding, and empirical research has generally shown that almost all- banks will meet capital guidelines. However, if the optimal leverage ratios differ among banks, then banks' responses to changes in capital requirements or to changes in factors that influence their optimal leverage ratio may vary in a cross section. the theoretical framework is a variant of the one developed in Bradley, Jarrell , and Kim (1984) . the optimal' leverage ratio balances the tax advantage of debt with the costs of bankruptcy. in addition to considering nondebt tax shields and tax rates as determinants of the optimal ratio, we analyze the simultaneity between leverage and investment in municipal securities (munis). Previous research indicates that banks utilize munis to' minimize tax liabilities.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9007.

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Date of creation: 1990
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Handle: RePEc:fip:fedcwp:9007
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  1. Kathleen A. Kuester & James M. O'Brien, 1989. "Bank equity values, bank risk, and the implied market values of banks' assets and liabilities," Finance and Economics Discussion Series 67, Board of Governors of the Federal Reserve System (U.S.).
  2. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  3. 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..
  4. Yair E. Orgler & Robert A. Taggart, Jr., 1981. "Implications of Corporate Capital Structure Theory for Banking Institutions," NBER Working Papers 0737, National Bureau of Economic Research, Inc.
  5. Michael C. Keeley & Frederick T. Furlong, 1987. "Bank capital regulation: a reconciliation of two viewpoints," Working Papers in Applied Economic Theory 87-06, Federal Reserve Bank of San Francisco.
  6. Thomson, James B, 1987. "The Use of Market Information in Pricing Deposit Insurance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 528-37, November.
  7. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
  8. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, vol. 43(5), pages 1219-33, December.
  9. Marcus, Alan J, 1983. " The Bank Capital Decision: A Time Series-Cross Section Analysis," Journal of Finance, American Finance Association, vol. 38(4), pages 1217-32, September.
  10. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
  11. 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.
  12. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  13. Hart, Oliver D & Jaffee, Dwight M, 1974. "On the Application of Portfolio Theory to Depository Financial Intermediaries," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 129-47, January.
  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. 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.
  16. Pyle, David H., 1986. "Capital regulation and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 189-201, June.
  17. Sealey, C W, Jr, 1983. " Valuation, Capital Structure, and Shareholder Unanimity for Depository Financial Intermediaries," Journal of Finance, American Finance Association, vol. 38(3), pages 857-71, June.
  18. 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 563-75, June.
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