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Bank Capital Requirements and Capital Structure

Author

Listed:
  • John P. Harding

    (University of Connecticut)

  • Xiaozhong Liang

    (State Street Corporation)

  • Stephen L. Ross

    (University of Connecticut)

Abstract

This paper studies the impact of capital requirements, deposit insurance and tax benefits on a bank's capital structure. We find that properly regulated banks voluntarily choose to maintain capital in excess of the minimum required. Central to this decision is both tax advantaged debt (a source of firm franchise value) and the ability of regulators to place banks in receivership stripping equity holders of firm value. These features of our model help explain both the capital structure of the large mortgage Government Sponsored Enterprises and the recent increase in risk taking through leverage by financial institutions.

Suggested Citation

  • John P. Harding & Xiaozhong Liang & Stephen L. Ross, 2009. "Bank Capital Requirements and Capital Structure," Working papers 2009-09, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2009-09
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    More about this item

    Keywords

    Banks; Capital Structure; Capital Regulation; Financial Intermediation; Leverage; GSE; Investment Banks;
    All these keywords.

    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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