Bank Capital Structure, Regulatory Capital, and Securities Innovations

FRB Atlanta Working Paper 2000-18

40 Pages Posted: 13 Dec 2000

See all articles by George J. Benston

George J. Benston

Emory University - Department of Accounting

Paul J. Irvine

Neeley School of Business

Jim Rosenfeld

Emory University - Department of Finance

Joseph F. Sinkey

Terry College of Business, The University of Georgia

Date Written: October 2000

Abstract

Although financial instruments that, in effect, permit corporations to treat preferred stock dividends as tax-deductible interest have been used by nonfinancial corporations since late 1993, bank holding companies (BHCs) did not issue these trust-preferred securities (TPS) until 1996, when the Federal Reserve qualified them as Tier-1 capital. We delineate and test hypotheses with 1) analyses of the stock-market reaction to the Fed's ruling and to TPS filings and 2) comparisons of BHCs that issued TPS with those that did not. We conclude that regulatory capital requirements, tax savings, and uninsured sources of funds can have significant positive effects on BHCs' demand for capital; growth and investment opportunities have an inconclusive effect; and transaction costs have a negative effect. Our results are not consistent with the moral-hazard hypothesis.

Keywords: Bank capital structure, bank holding companies, regulatory capital, securities innovations, Tier-1 capital, trust-preferred securities

JEL Classification: E5, G2, L1, L5

Suggested Citation

Benston, George J. and Irvine, Paul J. and Rosenfeld, James and Sinkey, Joseph F., Bank Capital Structure, Regulatory Capital, and Securities Innovations (October 2000). FRB Atlanta Working Paper 2000-18. Available at SSRN: https://ssrn.com/abstract=245813 or http://dx.doi.org/10.2139/ssrn.245813

George J. Benston

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-7831 (Phone)
404-727-5238 (Fax)

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

James Rosenfeld

Emory University - Department of Finance ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322-2710
United States

Joseph F. Sinkey (Contact Author)

Terry College of Business, The University of Georgia ( email )

205 St. George Drive
Athens, GA GEORGIA 30606-3907
United States
7064103395 (Phone)

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