The Leveraging Process of Bank Capital During the Pre-Crisis Period

35 Pages Posted: 4 Apr 2012

Date Written: April 3, 2012

Abstract

This paper studies the impact of bank growth on the quantity and quality of banks’ capital during the pre-crisis period. It presents an approach that combines traditional corporate finance theories, bank capital regulation and an analysis of the determinants to issue debt and capital instruments. Using data of Spanish banks during the period 1999-2007, we provide evidence that bank capital has been deteriorating as a result of a leveraging process within capital (increasing weight of hybrid capital) that responds to the same determinants that explain standard leverage. The reason is that banks financed the growing gap between loans and deposits with new debt issuances and the consequent capital needs were mainly covered with hybrid capital. The paper also presents evidence that capital regulation plays a key role in the decision to issue capital and debt instruments: debt issuances are preceded by the issuance of capital; capital issuances are substitutes of other internally-generated funds; and banks closer to the regulatory minimum are more likely to issue capital and limit the use of debt.

Keywords: bank capital regulation, leverage, hybrid capital, financial markets

JEL Classification: G21, G28

Suggested Citation

Martin-Oliver, Alfredo, The Leveraging Process of Bank Capital During the Pre-Crisis Period (April 3, 2012). Available at SSRN: https://ssrn.com/abstract=2033633 or http://dx.doi.org/10.2139/ssrn.2033633

Alfredo Martin-Oliver (Contact Author)

University of the Balearic Islands ( email )

Crtra. Valldemossa, km 7.5
Ed. Jovellanos
Palma de Mallorca, Illles Balears 07122
Spain

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