The Role of Bank Capital in Bank Holding Companies’ Decisions
March 16, 2015
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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
Pages:
37
Volume:
2015
DOI:
Issue:
057
Series:
Working Paper No. 2015/057
Stock No:
WPIEA2015057
ISBN:
9781498372237
ISSN:
1018-5941
