Regulatory Capital Management to Exceed Thresholds

Abstract

The Federal Deposit Insurance Corporation Act of 1991 introduced a 10% capitalization threshold, separating well-capitalized  from adequately capitalized  banks and granting benefits to the former. We document a strong discontinuity around the 10% threshold, suggesting that these benefits matter for banks. We find that banks manage regulatory capital to exceed the threshold and thus to pay lower deposit insurance fees and to have access brokered deposits and financial activities. To reach the threshold, banks use accounting discretion over accruals and real activities, increase equity, and change risk-weighted assets. We find some evidence that capital management hurts bank stability but only when banks use their accounting discretion to exceed the threshold.

Keywords: Banks, Discontinuities, Regulatory capital, Capital management, Bank stability