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How do banks adjust their capital ratios? Evidence from Germany

Author

Listed:
  • Memmel, Christoph
  • Raupach, Peter

Abstract

We analyze the dynamics of banks' regulatory capital ratios. Using monthly data of regulatory capital ratios for a subset of large German banks, we estimate the target level and the adjustment speed of the capital ratio for each bank separately. We find evidence that, first, there exists a target level for a substantial percentage of banks; second, that private banks and banks with liquid assets are more likely to adjust their capital ratio tightly; and third, that banks compensate for low target capital ratios with low asset volatilities and high adjustment speeds. Fourth, banks with a target capital ratio seem to use an internal lower limit for their current ratios that is just above the regulatory minimum of 8%.

Suggested Citation

  • Memmel, Christoph & Raupach, Peter, 2007. "How do banks adjust their capital ratios? Evidence from Germany," Discussion Paper Series 2: Banking and Financial Studies 2007,06, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp2:5577
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    More about this item

    Keywords

    Regulatory bank capital; target capital ratio; partial adjustment; Ornstein-Uhlenbeck process;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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