[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/55290.html
   My bibliography  Save this paper

A Primer on Regulatory Bank Capital Adjustments

Author

Listed:
  • Lubberink, Martien
Abstract
To calculate regulatory capital ratios, banks have to apply adjustments to book equity. These regulatory adjustments vary with a bank’s solvency position. Low-solvency banks report values of Tier 1 capital that exceed book equity. They use regulatory adjustments to inflate regulatory solvency ratios such as the Tier 1 leverage ratio and the Tier 1 risk-based capital ratio. In contrast, highly solvent banks report Tier 1 capital that is lower than book equity. These banks adjust their solvency ratios downward for prudential reasons, despite their resilient solvency levels. These results weaken the case for regulatory adjustments. The decreasing relationship between regulatory adjustments and bank solvency reflects the cost of deleveraging, a cost that demonstrates the resistance of banks to substituting equity for debt.

Suggested Citation

  • Lubberink, Martien, 2014. "A Primer on Regulatory Bank Capital Adjustments," MPRA Paper 55290, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55290
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/55290/1/MPRA_paper_55290.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    2. Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
    3. Anat R. Admati & Peter M. Demarzo & Martin F. Hellwig & Paul Pfleiderer, 2018. "The Leverage Ratchet Effect," Journal of Finance, American Finance Association, vol. 73(1), pages 145-198, February.
    4. Calomiris, Charles W. & Herring, Richard J., 2011. "Why and How to Design a Contingent Convetible Debt Requirement," Working Papers 11-41, University of Pennsylvania, Wharton School, Weiss Center.
    5. Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-456, May.
    6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    7. Kim, Myung-Sun & Kross, William, 1998. "The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 69-99, February.
    8. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    10. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    11. Pennacchi, George & Vermaelen, Theo & Wolff, Christian C. P., 2014. "Contingent Capital: The Case of COERCs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(3), pages 541-574, June.
    12. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    13. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    14. Beatty, A & Chamberlain, Sl & Magliolo, J, 1995. "Managing Financial Reports Of Commercial-Banks - The Influence Of Taxes, Regulatory Capital, And Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 33(2), pages 231-261.
    15. Miller, Merton H., 1995. "Do the M & M propositions apply to banks?," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 483-489, June.
    16. Ramesh, K. & Revsine, Lawrence, 2000. "The effects of regulatory and contracting costs on banks' choice of accounting method for other postretirement employee benefits," Journal of Accounting and Economics, Elsevier, vol. 30(2), pages 159-186, October.
    17. Gunther Gebhardt & Zoltan Novotny-Farkas, 2011. "Mandatory IFRS Adoption and Accounting Quality of European Banks," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(3-4), pages 289-333, April.
    18. Moyer, Susan E., 1990. "Capital adequacy ratio regulations and accounting choices in commercial banks," Journal of Accounting and Economics, Elsevier, vol. 13(2), pages 123-154, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fratzscher, Marcel & König, Philipp Johann & Lambert, Claudia, 2016. "Credit provision and banking stability after the Great Financial Crisis: The role of bank regulation and the quality of governance," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 113-135.
    2. Gropp, Reint & Mosk, Thomas & Ongena, Steven & Simac, Ines & Wix, Carlo, 2024. "Supranational Rules, National Discretion: Increasing Versus Inflating Regulatory Bank Capital?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 59(2), pages 830-862, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.
    2. Lubberink, Martien, 2014. "Are banks’ below-par own debt repurchases a cause for prudential concern?," MPRA Paper 59475, University Library of Munich, Germany.
    3. Murphy, Gareth & Walsh, Mark & Willison, Matthew, 2012. "Financial Stability Paper No 16: Precautionary contingent capital," Bank of England Financial Stability Papers 16, Bank of England.
    4. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    5. Manuela M. Dantas & Kenneth J. Merkley & Felipe B. G. Silva, 2023. "Government Guarantees and Banks' Income Smoothing," Papers 2303.03661, arXiv.org.
    6. Viral V. Acharya & Hamid Mehran & Anjan V. Thakor, 2016. "Caught between Scylla and Charybdis? Regulating Bank Leverage When There Is Rent Seeking and Risk Shifting," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 5(1), pages 36-75.
    7. Daniel Perez & Vicente Salas-Fumas & Jesus Saurina, 2008. "Earnings and Capital Management in Alternative Loan Loss Provision Regulatory Regimes," European Accounting Review, Taylor & Francis Journals, vol. 17(3), pages 423-445.
    8. Elnahass, Marwa & Izzeldin, Marwan & Steele, Gerald, 2018. "Capital and Earnings Management: Evidence from Alternative Banking Business Models," The International Journal of Accounting, Elsevier, vol. 53(1), pages 20-32.
    9. Mi Joo Lee & In Tae Hwang & Sun Min Kang, 2020. "The Effect of Forward‐looking Criteria and IFRS on the Informativeness of Banks’ Loan Loss Allowances: Evidence from Korea," Australian Accounting Review, CPA Australia, vol. 30(2), pages 85-104, June.
    10. de Bandt, Olivier & Camara, Boubacar & Maitre, Alexis & Pessarossi, Pierre, 2018. "Optimal capital, regulatory requirements and bank performance in times of crisis: Evidence from France," Journal of Financial Stability, Elsevier, vol. 39(C), pages 175-186.
    11. Pandey, Ashish & Guhathakurta, Kousik, 2022. "Value relevance of loan loss provision components and the choice of model specification," Advances in accounting, Elsevier, vol. 58(C).
    12. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 393-430, June.
    13. Beccalli, Elena & Frantz, Pascal & Lenoci, Francesca, 2018. "Hidden effects of bank recapitalizations," LSE Research Online Documents on Economics 89252, London School of Economics and Political Science, LSE Library.
    14. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2016. "Invisible hand discipline from informed trading: Does market discipline from trading affect bank capital structure?," MPRA Paper 76215, University Library of Munich, Germany.
    15. Domikowsky, Christian & Bornemann, Sven & Duellmann, Klaus & Pfingsten, Andreas, 2014. "Loan loss provisioning and procyclicality: Evidence from an expected loss model," Discussion Papers 39/2014, Deutsche Bundesbank.
    16. Cornett, Marcia Millon & Minnick, Kristina & Schorno, Patrick J. & Tehranian, Hassan, 2020. "An examination of bank behavior around Federal Reserve stress tests," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    17. Manuela M. Dantas & Kenneth J. Merkley & Felipe B. G. Silva, 2023. "Government Guarantees and Banks’ Income Smoothing," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(2), pages 123-173, April.
    18. Olivier de Bandt & Boubacar Camara & Pierre Pessarossi & Martin Rose, 2017. "Can better capitalised banks be more profitable? An analysis of large French banking groups before and after the financial crisis," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 494-495-4, pages 131-148.
    19. Hani El-Chaarani & Zouhour El-Abiad, 2019. "Analysis of Capital Structure and Performance of Banking Sector in Middle East Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 9(2), pages 1-11.
    20. Huang, Kershen & Petkevich, Alex, 2016. "Corporate bond pricing and ownership heterogeneity," Journal of Corporate Finance, Elsevier, vol. 36(C), pages 54-74.

    More about this item

    Keywords

    Keywords: Banking; Regulatory Capital; Solvency; Accounting.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:55290. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.