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Market forces at work in the banking industry: evidence from the capital buildup of the 1990s

Mark Flannery and Kasturi P. Rangan

No 904, Proceedings from Federal Reserve Bank of Chicago

Abstract: We document the build-up of regulatory and market equity capital in large U.S. bank holding companies between 1986 and 2000. During this time, large banking firms raised their capital ratios to the highest levels in more than 50 years. Since 1995, essentially none of the 100 largest U.S. banking firms have been constrained by regulatory capital standards. Nor do these firms appear to be protecting themselves explicitly against falling below supervisory minimum capital standards. Variation in bank equity ratios reliably reflects portfolio risk, and we attribute the capital increase to enhanced market incentives to monitor and price large banks' default risk.

Keywords: Banking structure; Banking market (search for similar items in EconPapers)
Date: 2002
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Published in Conference on Bank Structure and Competition (2002 : 38th) ; Financial market behavior and appropriate regulation over the business cycle

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