How Do Banks Adjust Their Capital Ratios? Evidence from Germany
36 Pages Posted: 8 Jun 2016
Date Written: 2007
We analyze the dynamics of banks' regulatory capital ratios. Using monthly data of regulatory capital ratios for a subset of large German banks, we estimate the target level and the adjustment speed of the capital ratio for each bank separately. We find evidence that, first, there exists a target level for a substantial percentage of banks; second, that private banks and banks with liquid assets are more likely to adjust their capital ratio tightly; and third, that banks compensate for low target capital ratios with low asset volatilities and high adjustment speeds. Fourth, banks with a target capital ratio seem to use an internal lower limit for their current ratios that is just above the regulatory minimum of 8%.
Keywords: Regulatory bank capital, target capital ratio, partial adjustment, Ornstein-Uhlenbeck process
JEL Classification: G32, G21
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