What Caused the Bank Capital Build-Up of the 1990s?

Posted: 14 Jul 2008

See all articles by Mark J. Flannery

Mark J. Flannery

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

Kasturi P. Rangan

Case Western Reserve University - Department of Banking & Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2008

Abstract

Large U.S. banks dramatically increased their capitalization during the 1990s, to the highest levels in more than 50 years. We document this buildup of capital and evaluate several potential motivations. Our results support the hypothesis that regulatory innovations in the early 1990s weakened conjectural government guarantees and enhanced bank counterparties' incentives to monitor and price default risk. We find no evidence that a bank holding company's (BHC's) market capitalization increases with its asset volatility prior to 1994. Thereafter, the data display a strong cross-sectional relation between capitalization and asset risk.

Keywords: G21, G28

Suggested Citation

Flannery, Mark Jeffrey and Rangan, Kasturi P., What Caused the Bank Capital Build-Up of the 1990s? (2008). Review of Finance, Vol. 12, Issue 2, pp. 391-429, 2008. Available at SSRN: https://ssrn.com/abstract=1159301 or http://dx.doi.org/10.1093/rof/rfm007

Mark Jeffrey Flannery (Contact Author)

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)

Kasturi P. Rangan

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3688 (Phone)
216-368-4776 (Fax)

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