Bank Capital Requirements and Capital Structure

John P. Harding, Xiaozhong Liang and Stephen Ross ()
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John P. Harding: University of Connecticut
Xiaozhong Liang: State Street Corporation

No 2009-09, Working papers from University of Connecticut, Department of Economics

Abstract: This paper studies the impact of capital requirements, deposit insurance and tax benefits on a bank's capital structure. We find that properly regulated banks voluntarily choose to maintain capital in excess of the minimum required. Central to this decision is both tax advantaged debt (a source of firm franchise value) and the ability of regulators to place banks in receivership stripping equity holders of firm value. These features of our model help explain both the capital structure of the large mortgage Government Sponsored Enterprises and the recent increase in risk taking through leverage by financial institutions.

Keywords: Banks; Capital Structure; Capital Regulation; Financial Intermediation; Leverage; GSE; Investment Banks (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G38 M48 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ban, nep-bec, nep-cfn, nep-reg, nep-rmg and nep-ure
Date: 2009-02

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Persistent link: http://EconPapers.repec.org/RePEc:uct:uconnp:2009-09

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