Heterogenous Banks and Macroprudential Regulations

Posted: 9 Apr 2019

See all articles by Subhendu Bhowal

Subhendu Bhowal

Massachusetts Institute of Technology, Sloan School of Management, Students

Date Written: February 11, 2019

Abstract

This paper studies how financial intermediation varies across banks. Bank size is a first-order determinant of banks’ capital structure in the cross-section. Largest banks have the lowest capital-to-asset ratio and the lowest ratio of Tier-1 capital against risk-weighted assets. These large banks earn a larger interest income per dollar invested in their loan portfolio than small banks, and they maintain the highest net interest margins among all banks. A cash flow sensitivity analysis shows that the largest banks are the most tightly constrained by minimum capital requirement, while all other banks maintain capital in excess of minimum capital requirement regulation. Empirically, banks do not adjust their lending portfolio dollar for dollar as their net profits increase or lever up immediately by issuing more deposits. Further, we find that the financial accelerator amplifies productivity shock in aggregate data. The impulse response to total productivity shock shows that the loan volume of the capital-constrained largest banks does not respond positively to positive productivity shocks. This is in contrast to smaller banks that increase loans when productivity improves in the economy.

Keywords: Banks, Financial Institutions, Macroeconomic Regulations, Bank Capital Structure

JEL Classification: G18, G21, G28, E58, E61

Suggested Citation

Bhowal, Subhendu, Heterogenous Banks and Macroprudential Regulations (February 11, 2019). Available at SSRN: https://ssrn.com/abstract=3352912 or http://dx.doi.org/10.2139/ssrn.3352912

Subhendu Bhowal (Contact Author)

Massachusetts Institute of Technology, Sloan School of Management, Students ( email )

Cambridge, MA 02139
United States

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