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Market forces at work in the banking industry: evidence from the capital buildup of the 1990s

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  • Mark J. Flannery
  • Kasturi P. Rangan

Abstract

We document the build-up of regulatory and market equity capital in large U.S. bank holding companies between 1986 and 2000. During this time, large banking firms raised their capital ratios to the highest levels in more than 50 years. Since 1995, essentially none of the 100 largest U.S. banking firms have been constrained by regulatory capital standards. Nor do these firms appear to be protecting themselves explicitly against falling below supervisory minimum capital standards. Variation in bank equity ratios reliably reflects portfolio risk, and we attribute the capital increase to enhanced market incentives to monitor and price large banks' default risk.

Suggested Citation

  • Mark J. Flannery & Kasturi P. Rangan, 2002. "Market forces at work in the banking industry: evidence from the capital buildup of the 1990s," Proceedings 904, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhpr:904
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    Cited by:

    1. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2006. "Can feedback from the jumbo CD market improve bank surveillance?," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 92(Spr), pages 135-175.
    2. Carletti, Elena & Cerasi, Vittoria & Daltung, Sonja, 2007. "Multiple-bank lending: Diversification and free-riding in monitoring," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 425-451, July.
    3. Süheyla Özyıldırım, 2010. "Intermediation Spread, Bank Supervision, and Financial Stability," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(04), pages 517-537.
    4. Dermine, Jean, 2015. "Basel III leverage ratio requirement and the probability of bank runs," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 266-277.

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    Keywords

    Banking market; Banking structure;

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