How Do Banks Adjust Their Capital Ratios? Evidence from Germany

36 Pages Posted: 8 Jun 2016

See all articles by Christoph Memmel

Christoph Memmel

Deutsche Bundesbank

Peter Raupach

Deutsche Bundesbank - Research Department

Date Written: 2007

Abstract

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

Suggested Citation

Memmel, Christoph and Raupach, Peter, How Do Banks Adjust Their Capital Ratios? Evidence from Germany (2007). Bundesbank Series 2 Discussion Paper No. 2007,06. Available at SSRN: https://ssrn.com/abstract=2793991

Christoph Memmel (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Peter Raupach

Deutsche Bundesbank - Research Department ( email )

Wilhelm-Epstein-Str. 14
Frankfurt, 60431
Germany
+49 69 9566 8536 (Phone)

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