The Role of Bank Capital in Bank Holding Companies’ Decisions

Adolfo Barajas, Thomas Cosimano, Dalia Hakura and Sebastian Roelands

No 2015/057, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the role of bank capital in decision-making by bank holding companies (BHCs) in the United States. Following Chami and Cosimano’s (2001) call option approach to bank capital, BHCs optimally choose the amount of capital to insure the bank against becoming capital constrained in the future. We provide empirical support for this model, and find that a higher optimal level of capital leads to higher loan rates. Furthermore, higher loan rates result in lower amounts of lending. Thus, an increase in capital requirements is likely to lead to higher loan rates and a significant reduction in lending.

Keywords: WP; capital ratio; bank holding company; Bank holding companies; capital constraints; loan rate; loan demand; loan quantity; loan growth; demand regression; increase in capital capital ratio; Loans; Capital adequacy requirements; Bank credit; Stocks (search for similar items in EconPapers)
Pages: 37
Date: 2015-03-16
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Citations: View citations in EconPapers (2)

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