Capital, Portfolio, and Growth: Bank Behavior Under Risk-Based Capital Guidelines

This paper examines banks' capital, portfolio and growth decisions from 1986 to 1995, when risk-based capital guidelines were proposed and implemented. Overall, we observe complementarity between equity financing and risk. We find no systematic differences in pre- and postregulation behavior consistent with banks reacting to risk-based capital standards implementation. We do find significant differences, however, between low-capital banks and other banks. For example, increases in equity generally do not lead to increases in assets unless the bank has low capital. We also find that the impact of regulatory variables, such as the ratio of equity to total assets or the of ratio risk-weighted assets to total assets, have the predicted, significant effects for low-capital banks but not necessarily for other banks.

[1]  David R. Peterson,et al.  Bank holding company capital targets in the early 1990s: The regulators versus the markets , 1995 .

[2]  P. Asquith,et al.  Equity issues and offering dilution , 1986 .

[3]  David J. Denis.  Investment Opportunities and the Market Reaction to Equity Offerings , 1994, Journal of Financial and Quantitative Analysis.

[4]  A. Kalay,et al.  Positive information from equity issue announcements , 1993 .

[5]  Ronald Johnson.  The bank credit "crumble." , 1991 .

[6]  Merton H. Miller,et al.  Dividend Policy under Asymmetric Information , 1985 .

[7]  Eric S. Rosengren,et al.  The Capital Crunch: Neither a Borrower nor a Lender Be , 1995 .

[8]  Andrew H. Chen,et al.  Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital , 1981 .

[9]  Allen N. Berger,et al.  The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been , 1995 .

[10]  D. Hancock,et al.  Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulations , 1994 .

[11]  Richard M Cantor,et al.  Bank capital ratios, asset growth, and the stock market , 1992 .

[12]  Sudipto Bhattacharya,et al.  Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy , 1979 .

[13]  J. Hausman.  Specification tests in econometrics , 1978 .

[14]  Allen N. Berger,et al.  The role of capital in financial institutions , 1995 .

[15]  Peter E. Kennedy.  A Guide to Econometrics , 1979 .

[16]  Ronald W. Masulis,et al.  Seasoned Equity Offerings: An Empirical Investigation , 1986 .

[17]  D. Hancock,et al.  Has There Been a "Capital Crunch" in Banking? The Effects on Bank Lending of Real Estate Market Conditions and Bank Capital Shortfalls , 1993 .

[18]  Alan J. Marcus,et al.  Deregulation and bank financial policy , 1984 .

[19]  Allen N. Berger,et al.  Did Risk-Based Capital Allocate Bank Credit and Cause a 'Credit Crunch' in the United States? , 1994 .

[20]  Merton H. Miller.  Do the M & M propositions apply to banks? , 1995 .

[21]  Larry Cordell,et al.  A market evaluation of the risk-based capital standards for the U.S. financial system , 1995 .

[22]  Joseph G. Haubrich,et al.  Capital Requirements and Shifts in Commercial Bank Portfolios , 1993 .

[23]  Marcia Millon Cornett,et al.  An examination of voluntary versus involuntary security issuances by commercial banks The impact of capital regulations on common stock returns , 1994 .

[24]  Kenneth A. Froot,et al.  Risk Management: Coordinating Corporate Investment and Financing Policies , 1992 .