How Do Large Banking Organizations Manage Their Capital Ratios?

27 Pages Posted: 27 Feb 2008 Last revised: 6 Feb 2011

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Robert DeYoung

University of Kansas School of Business

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

David K. Lee

FDIC, Division of Insurance and Research

Özde Öztekin

Florida International University (FIU)

Date Written: February 1, 2008

Abstract

U.S. banks hold significantly more equity capital than required by their regulators. We test competing hypotheses regarding the reasons for this “excess” capital, using an innovative partial adjustment approach that allows estimated BHC-specific capital targets and adjustment speeds to vary with firm-specific characteristics. We apply the model to annual panel data for publicly traded U.S. bank holding companies (BHCs) from 1992 through 2006, an extended period of increasing bank capital that ended just before the subprime credit crisis of 2007–2008. The evidence suggests that BHCs actively managed their capital ratios (as opposed to passively allowing capital to build up via retained earnings), set target capital levels substantially above well-capitalized regulatory minima, and (especially poorly capitalized BHCs) made rapid adjustments toward their targets.

Keywords: Banks, Capital management, Capital regulation, Partial adjustment models

JEL Classification: G21, G28, G32

Suggested Citation

Berger, Allen N. and DeYoung, Robert and Flannery, Mark Jeffrey and Lee, David K. and Öztekin, Özde, How Do Large Banking Organizations Manage Their Capital Ratios? (February 1, 2008). Journal of Financial Services Research, Vol. 34, No. 2-3, 2008. Available at SSRN: https://ssrn.com/abstract=1098928

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Robert DeYoung

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

David K. Lee

FDIC, Division of Insurance and Research ( email )

550 17th Street NW
Washington, DC 20429
United States

Özde Öztekin

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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