Portfolio and Financing Adjustments for U.S. Banks: Some Empirical Evidence

56 Pages Posted: 16 Feb 2008 Last revised: 29 Jun 2009

Multiple version iconThere are 3 versions of this paper

Date Written: May 2008

Abstract

This paper presents a model of the portfolio and financing adjustments of U.S. banks over the business cycle. At the core of the model is a moral hazard problem between depositors/bank regulators and stockholders. The solution to this problem takes the form of shared management of the bank. Stockholders manage the bank's portfolio and the regulator manages the financing of the portfolio. The model predicts that portfolio adjustments are made to conform to the risk aversion of shareholders and financing adjustments are made to offset changes in portfolio risk. Regression evidence for 1955-2000 fails to reject these predictions.

Keywords: Banks, Business Cycles, Basle Accord, Finance

JEL Classification: E3, G2, L2

Suggested Citation

Krainer, Robert, Portfolio and Financing Adjustments for U.S. Banks: Some Empirical Evidence (May 2008). Paolo Baffi Centre Research Paper No. 2008-19, Available at SSRN: https://ssrn.com/abstract=1093348 or http://dx.doi.org/10.2139/ssrn.1093348

Robert Krainer (Contact Author)

Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

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