Investigation on the Comparative Persistence and Convergence of Risk and Non-Risk Adjusted Bank Capital Ratios

26 Pages Posted: 22 Oct 2010 Last revised: 28 Dec 2010

Clovis Rugemintwari

Université de Limoges, LAPE

Date Written: September 1, 2010

Abstract

We depart from the fact that in Europe, unlike the leverage ratio, risk-based capital ratios are formally under capital regulation with specified minimum thresholds to be respected. Building on this difference, we study their comparative persistence and convergence. For this purpose, we borrow the graphical analysis of Lemmon et al. (2008) and use the empirical partial adjustment model. Overall, consistent with the findings from the corporate finance literature, we find that bank capital structure is quite stable over long periods of time: banks that have high (low) capital ratios tend to remain as such for over eight years. Nevertheless, we find that even though all future capital ratios are influenced by initial capital ratios, this influence seems comparatively more relevant for the non risk-based (or leverage) capital ratio highlighting its high persistent phenomenon. Our findings also point to the role played by market participants in the trend and the relative rapid convergence of the risk-adjusted capital ratios compare to the simple leverage ratio. Our results are thus broadly supportive of recent policy initiatives that aim to strengthen the bank capital regulation by introducing a minimum leverage ratio and by simultaneously improving market discipline.

Keywords: Prudential regulation, Basel Accords, Capital structure, leverage ratio

JEL Classification: G21, G28, G32

Suggested Citation

Rugemintwari, Clovis, Investigation on the Comparative Persistence and Convergence of Risk and Non-Risk Adjusted Bank Capital Ratios (September 1, 2010). Paris December 2010 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=1695483 or http://dx.doi.org/10.2139/ssrn.1695483

Clovis Rugemintwari (Contact Author)

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

HOME PAGE: http://www.unilim.fr/lape/staff/full-time/article/clovis-rugemintwari

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