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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Bank Risk Taking and Competition Revisited
By John H. Boyd and Gianni De Nicolo
-
Liberalization, Moral Hazard in Banking and Prudential Regulation: Are Capital Requirements Enough?
-
Competition and Financial Stability
By Franklin Allen and Douglas M. Gale
-
Capital Requirements, Market Power and Risk-Taking in Banking
-
Size, Charter Value and Risk in Banking: An International Perspective
-
Competition and Stability: What's Special About Banking?
By Elena Carletti and Philipp Hartmann
-
Bank Risk-Taking and Competition Revisited: New Theory and New Evidence
By John H. Boyd, Gianni De Nicolo, ...
-
By Thorsten Beck, Asli Demirgüç-kunt, ...
-
By Thorsten Beck, Asli Demirgüç-kunt, ...