How Does Competition Affect Bank Capital Structure? Evidence From a Natural Experiment
70 Pages Posted: 24 May 2018 Last revised: 21 Feb 2019
Date Written: February 19, 2019
Using dynamic models, we test how geographic deregulation of U.S. banking affects bank capital structure. We find increased competition from deregulation increases target capital ratios and speeds up adjustment towards these targets. Further investigation suggests that charter values are the most important channel explaining target capital, while sensitivity to economic conditions is key to explaining adjustment speeds. We also find a significant regime change to more active capital management after interstate branching deregulation. Results are robust to numerous checks. Findings imply financial stability benefits from deregulation, and support the competition-stability view, but primarily through a different mechanism than the literature.
Keywords: Competition, Deregulation, Banking, Capital Structure, Adjustment Speed
JEL Classification: G18, G21, G28
Suggested Citation: Suggested Citation