The Role of Bank Capital in Bank Holding Companies’ Decisions

38 Pages Posted: 14 Apr 2015

See all articles by Adolfo Barajas

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Dalia Hakura

International Monetary Fund (IMF)

Sebastian Roelands

Bowling Green State University

Date Written: March 2015

Abstract

This paper examines the role of bank capital in decision-making by bank holding companies (BHCs) in the United States. Following Chami and Cosimano’s (2001) call option approach to bank capital, BHCs optimally choose the amount of capital to insure the bank against becoming capital constrained in the future. We provide empirical support for this model, and find that a higher optimal level of capital leads to higher loan rates. Furthermore, higher loan rates result in lower amounts of lending. Thus, an increase in capital requirements is likely to lead to higher loan rates and a significant reduction in lending.

Keywords: Banks, United States, Bank capital, Panel analysis, Vector autoregression, Bank holding companies, capital constraints, loans, interest, equity, lending, value, risk, capital requirements, interest rates

JEL Classification: E50, G20

Suggested Citation

Barajas, Adolfo and Cosimano, Thomas F. and Hakura, Dalia and Roelands, Sebastian, The Role of Bank Capital in Bank Holding Companies’ Decisions (March 2015). IMF Working Paper No. 15/57. Available at SSRN: https://ssrn.com/abstract=2594140

Adolfo Barajas (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

Thomas F. Cosimano

University of Notre Dame ( email )

513 W. Broad #704
Falls Church, VA 22046
United States
574-807-4876 (Phone)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dalia Hakura

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Sebastian Roelands

Bowling Green State University ( email )

Bowling Green, OH 43403
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
34
Abstract Views
469
PlumX Metrics