Excess Control Rights, Bank Capital Structure Adjustment and Lending

43 Pages Posted: 31 Mar 2014 Last revised: 15 Apr 2014

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

Date Written: March 30, 2014

Abstract

We investigate whether excess control rights of ultimate owners in pyramids affect banks' adjustment to their target capital ratio. When ultimate control rights and cash-flow rights are identical, banks increase their capital ratio by issuing equity and by reshuffling their assets without slowing their lending. However, when control rights exceed cash-flow rights, banks are reluctant to issue equity to increase their capital ratio and, instead, shrink their assets by mainly cutting their lending. A deeper investigation shows that this behavior is only apparent in family-controlled banks and in countries with relatively weak shareholder protection rights. Our findings provide new insights in the capital structure adjustment process and have critical policy implications for the implementation of Basel III.

Keywords: dynamic capital structure, bank lending, pyramids, excess control rights, European banking

JEL Classification: G32, G21, G28

Suggested Citation

Lepetit, Laetitia and Tarazi, Amine and Zedek, Nadia, Excess Control Rights, Bank Capital Structure Adjustment and Lending (March 30, 2014). Available at SSRN: https://ssrn.com/abstract=2418023 or http://dx.doi.org/10.2139/ssrn.2418023

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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