The Role of Bank Capital in Bank Holding Companies’ Decisions

By Adolfo Barajas, Thomas F. Cosimano, Dalia S Hakura, Sebastian Roelands

March 16, 2015

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Adolfo Barajas, Thomas F. Cosimano, Dalia S Hakura, and Sebastian Roelands. The Role of Bank Capital in Bank Holding Companies’ Decisions, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the role of bank capital in decision-making by bank holding companies (BHCs) in the United States. Following Chami and Cosimano’s (2001) 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.

Subject: Bank credit, Banking, Capital adequacy requirements, Financial crises, Financial institutions, Financial regulation and supervision, Loans, Money, Stocks

Keywords: Bank credit, Bank holding companies, Bank holding company, Capital adequacy requirements, Capital constraints, Capital ratio, Demand regression, Increase in capital capital ratio, Loan demand, Loan growth, Loan quantity, Loan rate, Loans, Stocks, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/057
Stock No:

WPIEA2015057
ISBN:

9781498372237
ISSN:

1018-5941

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