How do banks adjust their capital ratios? Evidence from Germany

Christoph Memmel () and Peter Raupach ()

No 2007,06, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre

Abstract: We analyze the dynamics of banks’ regulatory capital ratios. Using monthly data of regulatory capital ratios for a subset of large German banks, we estimate the target level and the adjustment speed of the capital ratio for each bank separately. We find evidence that, first, there exists a target level for a substantial percentage of banks; second, that private banks and banks with liquid assets are more likely to adjust their capital ratio tightly; and third, that banks compensate for low target capital ratios with low asset volatilities and high adjustment speeds. Fourth, banks with a target capital ratio seem to use an internal lower limit for their current ratios that is just above the regulatory minimum of 8%.

Keywords: Regulatory bank capital; target capital ratio; partial adjustment; Ornstein-Uhlenbeck process (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-eec and nep-reg
Date: 2007

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