The Role of Bank Capital in Bank Holding Companies’ Decisions

Abstract

This paper examines the role of bank capital in decision-making by bank holding companies (BHCs) in the United States. Following call option approach to bank capital, BHCs optimally choose the amount of capital to insure the bank against becoming capital constrained in the future. We provide empirical support for this model, and find that a higher optimal level of capital leads to higher loan rates. Furthermore, higher loan rates result in lower amounts of lending. Thus, an increase in capital requirements is likely to lead to higher loan rates and a significant reduction in lending.

Capital Regulation and Competition as a Moderator for Banking Stability

“…This is supported by recent empirical evidence from Barajas et al. (), who analyze the circumstances under which equity is more costly than other sources of funding.…”

Lending conditions in EU: The role of credit demand and supply

“…Similarly to Cosimano and Hakura (2011) and Barajas et al (2015), we can see that the semielasticity of loan demand has become negative and high since the crisis. Finally, in our analysis, we also analyse the impact of some selected institutional factors.…”

“…(1) bank lending surveys related to lending standards set by bank managers for short horizons (Rajan, 1994;Asea and Blomberg, 1998;Berger and Udell, 2004;Ruckes, 2004), (2) the semielasticity of loan demand using instrumental variables (Cosimano and Hakura, 2011;Bassett et al, 2014;Barajas et al, 2015), (3) the disequilibrium model of credit demand and supply to test the credit crunch hypothesis (Clower, 1965;Barro and Grossman, 1971;Benassy, 1975;Drèze, 1975;Maddala and Nelson, 1974), (4) two cointegrating relationships representing loan demand and supply (Hülsewig et al, 2006;de Mello and Pisu, 2010). …”

The Performance of Islamic Vs. Conventional Banks: Evidence on the Suitability of the Basel Capital Ratios

“…Finally, banks that plan to have future mergers prefer to maintain higher capital buffers to ensure regulators' acceptance. As for the impact on bank performance, the literature shows that higher ratios ameliorate bank profitability and efficiency because they create an incentive for bank managers to avoid risk, ameliorate monitoring and supervision of lending activities, lower bank costs 17 Barajas et al (2015) argue that there are four factors in corporate finance that make raising equity costly: insufficient information about bank loan portfolios,, favorable conditions regarding the tax treatment of dividends, the existence of a too-big-to-fail policy, and, the use of a deposit insurance scheme. According to the authors, these factors put constraints on Modigliani and Miller's (for more details, see Chami et al (2001)) theorem that posits that bank capital structure is irrelevant to its value and thus financing bank operations should not be constrained by a bank's equity.…”