Economics of Capital Adjustment in the US Commercial Banks: Empirical Analysis

27 Pages Posted: 29 Jan 2021

See all articles by Faisal Abbas

Faisal Abbas

The University of Lahore, Lahore, Pakistan

Shoaib Ali

Air University - Islamabad

Ghulame Rubbaniy

Zayed University - College of Business

Date Written: January 18, 2021

Abstract

Using GMM framework on the data of the US commercial banks over the period from 2002 to 2018, this study shows that banks adjust their regulatory capital ratios faster than traditional capital ratios; and, in most cases, the speed of adjustment of a traditional capital ratio is lower than regulatory capital ratios. Our results show that the speed of regulatory capital ratio of well-capitalized banks is faster than adequately-capitalized and under-capitalized banks. Our analysis report that high-liquid banks adjust their capital ratios faster than low-liquid banks. We also find that the speed of adjustment of regulatory capital of too-big-to-fail banks is lower than well-capitalized, adequately-capitalized, nationally-chartered, and state-chartered banks. In addition, the speed of adjustment of regulatory capital ratios of commercial banks is higher in the post-crisis period than the pre-crisis era. Although scholars suggest that adjustment of capital ratios through rebalancing liabilities is more beneficial to the banks, our findings show that banks also use their assets side of balance sheet to rebalance their capital ratios. Our findings suggest that the regulators may consider the heterogeneity in the speed of capital adjustment across different bank characteristics for the formulation of new bank regulations; particularly, when assessing and adjusting the specific capital requirements through Pillar II of the Basel III agreement.

Keywords: Capital Ratio, Regulatory Ratio, Tier-I Ratio, Speed of Capital Adjustment, Bank Charters

JEL Classification: G20, G21, G28

Suggested Citation

Abbas, Faisal and Ali, Shoaib and Rubbaniy, Ghulame, Economics of Capital Adjustment in the US Commercial Banks: Empirical Analysis (January 18, 2021). Available at SSRN: https://ssrn.com/abstract=3769290 or http://dx.doi.org/10.2139/ssrn.3769290

Faisal Abbas (Contact Author)

The University of Lahore, Lahore, Pakistan ( email )

1-KM, Raiwind Road, Lahore, Pakistan
Lahore, Punjab 54000
Pakistan

Shoaib Ali

Air University - Islamabad ( email )

Service Road E-9
Islamabad, 44000
Pakistan

Ghulame Rubbaniy

Zayed University - College of Business ( email )

Zayed University
P.O. Box 144534
Abu Dhabi
United Arab Emirates

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