Effects of Capital Requirements on Banks' Balance Sheets: Causal Evidence from Qualifying Trust-Preferred Securities

Posted: 19 Mar 2024

See all articles by Pietro Bonaldi

Pietro Bonaldi

Carnegie Mellon University

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University

Lavender Yang

Carnegie Mellon University

Date Written: October 28, 2023

Abstract

We provide causal evidence on how banks respond to more stringent capital requirements. We study the reaction to a regulatory change restricting US banks with more than $15 billion in total assets from including Trust-Preferred Securities (TruPS) in Tier 1 capital. Using a regression discontinuity design, we show that banks just above the $15 billion threshold lowered their reported Tier 1 capital and total consolidated assets for every year from 2014 to 2018. Collectively, our findings show that tighter capital requirements caused affected banks to shrink in size.

Keywords: capital requirements, trust-preferred securities, bank balance sheet

JEL Classification: G21, G28, F33

Suggested Citation

Bonaldi, Pietro and Liang, Pierre Jinghong and Yang, Lavender, Effects of Capital Requirements on Banks' Balance Sheets: Causal Evidence from Qualifying Trust-Preferred Securities (October 28, 2023). Available at SSRN: https://ssrn.com/abstract=4763781

Pietro Bonaldi (Contact Author)

Carnegie Mellon University ( email )

Pierre Jinghong Liang

Tepper School of Business, Carnegie Mellon University ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-3315 (Phone)
412-268-6837 (Fax)

HOME PAGE: http://www2.tepper.cmu.edu/andrew/liangj

Lavender Yang

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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