Market Forces at Work in the Banking Industry: Evidence from the Capital Buildup of the 1990s
Mark J. Flannery
University of Florida - Department of Finance, Insurance and Real Estate
Kasturi P. Rangan
Case Western Reserve University - Department of Banking & Finance
AFA 2003 Washington, DC Meetings; EFA 2002 Berlin Meetings Presented Paper
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 de jure 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 risks.
Number of Pages in PDF File: 49
JEL Classification: G21, G28, G32, G38working papers series
Date posted: March 4, 2002
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