Geographic Deregulation and Bank Capital Structure
51 Pages Posted: 24 May 2018 Last revised: 19 Aug 2023
Date Written: October 7, 2022
Abstract
The literature demonstrates numerous consequences of bank geographic deregulation, but neglects bank capital structure – critical to performance, resilience, and prudential regulation/supervision. We supply first-time evidence on geographic deregulation effects on bank capital. We also distinguish and test two novel mechanisms through which geographic deregulation may affect bank behavior. The competitive defense and competitive offense mechanisms differentiate deregulation effects in increasing external competitive pressures on banks versus expanding banks’ capacity to compete externally. We find statistically and economically significant evidence of geographic deregulation effects on two bank capital management tools – target capital ratios and speeds of adjustment to these targets – yielding higher targets and faster adjustment. Findings are robust to addressing identification concerns using dynamic panel methodology, a gravity-deregulation approach, and time-varying bank-specific instruments. The data also support both the competitive defense and competitive offense mechanisms, suggesting future research and policy applications of these mechanisms to banking and more generally.
Keywords: Competition, Deregulation, Banking, Capital Structure, Adjustment Speed
JEL Classification: G18, G21, G28
Suggested Citation: Suggested Citation