Ultimate Ownership Structure and Bank Regulatory Capital Adjustment: Evidence from European Commercial Banks

57 Pages Posted: 25 May 2012 Last revised: 25 Jan 2013

See all articles by Laetitia Lepetit

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE)

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Nadia Zedek

Universite de Limoges, LAPE

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Date Written: October 6, 2012

Abstract

This paper empirically investigates whether a bank's decision to adjust its capital is influenced by the existence of a divergence between the voting and the cash-flow rights of its ultimate owner. We use a novel hand-collected dataset on detailed control and ownership characteristics of 405 European commercial banks to estimate an ownership-augmented capital adjustment model over the 2003-2010 period. We find no differences in adjustment speeds when banks need to adjust their Tier 1 capital downwards to reach their target capital ratio. However, when the adjustment process requires an upward shift in Tier 1 capital, the adjustment is significantly slower for banks controlled by a shareholder with a divergence between voting and cash-flow rights. Further investigation shows that such an asymmetry only holds if the ultimate owner is a family or a state or if the bank is headquartered in a country with relatively weak shareholder protection. Moreover, this behavior is tempered during the 2008 financial crisis, possibly because of government capital injections or support from ultimate owners (propping up). Our findings provide new insights for understanding capital adjustment in general and have policy implications on the road to the final stage of Basel III in 2019.

Keywords: Ownership structure, pyramids, regulatory bank capital, European banking, adjustment speed, voting rights, cash-flow rights

JEL Classification: G21, G28, G32

Suggested Citation

Lepetit, Laetitia and Tarazi, Amine and Zedek, Nadia, Ultimate Ownership Structure and Bank Regulatory Capital Adjustment: Evidence from European Commercial Banks (October 6, 2012). 25th Australasian Finance and Banking Conference 2012, Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2065816 or http://dx.doi.org/10.2139/ssrn.2065816

Laetitia Lepetit

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Felix Eboue
BP 3127
Limoges Cedex 1, 87031
France
+33555149213 (Phone)

HOME PAGE: http://www.unilim.fr/lape/

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Nadia Zedek (Contact Author)

Universite de Limoges, LAPE ( email )

rue François Mitterrand
Limoges Cedex, FL Limoges 87031
France

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