How Do Banks Adjust Their Capital Ratios?

Posted: 16 Aug 2010 Last revised: 19 Aug 2010

See all articles by Christoph Memmel

Christoph Memmel

Deutsche Bundesbank

Peter Raupach

Deutsche Bundesbank - Research Department

Date Written: August 13, 2010

Abstract

We analyze the dynamics of banks' regulatory capital ratios. Using monthly regulatory data of large German banks, we estimate the target level and the adjustment speed of the capital ratio for each bank separately. There exists a target level for a substantial percentage of banks. Unlike with panel regressions, we can estimate individual adjustment speeds and find large variation across banks. Adjustments on the liability side are most effective, although adjustment rates on the asset side are higher. Private commercial banks (neither state-owned nor cooperative) and banks with a high level of proprietary trading are more likely to adjust their capital ratio tightly. Banks with a target capital ratio compensate for low target ratios with low asset volatilities and high adjustment speeds. They seem to care mainly about the resulting probability to comply with the regulatory minimum. Assuming low variation of this probability explains most of the large cross-sectional variation of bank capital.

Keywords: Regulatory bank capital, Target capital ratio, Partial adjustment

JEL Classification: G21, G32

Suggested Citation

Memmel, Christoph and Raupach, Peter, How Do Banks Adjust Their Capital Ratios? (August 13, 2010). Journal of Financial Intermediation, Vol. 19, No. 4, pp. 509-528, 2010. Available at SSRN: https://ssrn.com/abstract=1658407

Christoph Memmel (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Peter Raupach

Deutsche Bundesbank - Research Department ( email )

Wilhelm-Epstein-Str. 14
Frankfurt, 60431
Germany
+49 69 9566 8536 (Phone)

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