How Does Competition Affect Bank Capital Structure? Evidence From a Natural Experiment

70 Pages Posted: 24 May 2018 Last revised: 21 Feb 2019

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Özde Öztekin

Florida International University (FIU)

Raluca A. Roman

Federal Reserve Bank of Philadelphia

Date Written: February 19, 2019

Abstract

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

Berger, Allen N. and Öztekin, Özde and Roman, Raluca A., How Does Competition Affect Bank Capital Structure? Evidence From a Natural Experiment (February 19, 2019). Available at SSRN: https://ssrn.com/abstract=3177995 or http://dx.doi.org/10.2139/ssrn.3177995

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Özde Öztekin (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Raluca A. Roman

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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