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Portfolio and Financing Adjustments for U.S. Banks: Some Empirical Evidence

Robert E. Krainer
University of Wisconsin, Madison - School of Business

Journal of Financial Stability, Forthcoming

Abstract:
This paper presents a model of the portfolio and financing adjustments of U.S. banks over the business cycle. At the core of the model is a moral hazard problem between depositors/bank regulators and stockholders. The solution to this problem takes the form of shared management of the bank. Stockholders manage the bank's portfolio and the regulator manages the financing of the portfolio. The model predicts that portfolio adjustments are made to conform to the risk aversion of shareholders and financing adjustments are made to offset changes in portfolio risk. Regression evidence for 1955-2000 fails to reject these predictions.

Keywords: Banks, Business Cycles, Basle Accord, Finance

JEL Classifications: E3, G2, L2

Accepted Paper Series

Date posted: July 11, 2008 ; Last revised: July 11, 2008

Suggested Citation

Krainer, Robert E., Portfolio and Financing Adjustments for U.S. Banks: Some Empirical Evidence (July 11, 2008). Journal of Financial Stability, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1158517

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Contact Information

Robert E. Krainer (Contact Author)

University of Wisconsin, Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-1253 (Phone)
608-265-4195 (Fax)