Market Forces at Work in the Banking Industry: Evidence from the Capital Buildup of the 1990s

49 Pages Posted: 4 Mar 2002

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Kasturi P. Rangan

Case Western Reserve University - Department of Banking & Finance

Date Written: September 2002

Abstract

We document the build-up of regulatory and market equity capital in large U.S. bank holding companies between 1986 and 2000. During this time, large banking firms raised their capital ratios to the highest levels in more than 50 years. Since 1995, essentially none of the 100 largest U.S. banking firms have been constrained by de jure regulatory capital standards. Nor do these firms appear to be protecting themselves explicitly against falling below supervisory minimum capital standards. Variation in bank equity ratios reliably reflects portfolio risk, and we attribute the capital increase to enhanced market incentives to monitor and price large banks' default risks.

JEL Classification: G21, G28, G32, G38

Suggested Citation

Flannery, Mark Jeffrey and Rangan, Kasturi P., Market Forces at Work in the Banking Industry: Evidence from the Capital Buildup of the 1990s (September 2002). AFA 2003 Washington, DC Meetings; EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=302138 or http://dx.doi.org/10.2139/ssrn.302138

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Kasturi P. Rangan (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States
216-368-3688 (Phone)
216-368-4776 (Fax)

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