Why do banks choose to finance with equity?

A majority of U.S. banks between 1973 and 2012 held equity capital significantly beyond the required minimum. We study the risk-return tradeoff in connection with a bank’s capital structure, and identify several new significant market factors that drive the level of equity capital in banks. During normal growth periods, bank leverage is negatively related to a level of competition and loan portfolio diversification, while high bank leverage is associated with low past liquidity. During recessions and expansions, the roles of those factors change following distortions in risk-return tradeoff. In distress, when banks approach regulatory capital requirements, market determinants of book leverage lose their significance; however, leverage does not decrease until a bank is within 1% of the minimal capital threshold.     

银行权益资本使用及其对规模经济测度的影响

将所有者权益的作用嵌入银行技术模型,测算中国十六家上市商业银行满足成本最小化时的所有者权益影子价格,并以成本最小化为标准评价权益资本使用情况。研究发现,五家国有大型商业银行持有高于最小化成本水平的所有者权益;其余大部分股份制商业银行的权益资本低于成本最小化要求。进一步测算规模经济,发现所有者权益进入成本方程后计算出的规模经济效应比仅以所有者权益为条件调节项和使用标准成本方程估计出的规模经济结果都要高,说明规模经济的轨迹将依赖于银行对负债与所有者权益相对信任度,即提高存款和所有者权益的相对成本及所有者权益资本以多大程度进入到成本函数设定中。     

Accounting for banks,capital regulation and risk-taking

This paper examines risk-taking incentives in banks under different accounting regimes in presence of capital regulation. In the model the bank jointly determines the capital issuance and investment policy. Given an exogenous minimum capital requirement, lower-of-cost-or-market accounting is the most effective regime that induces the bank to issue more excess equity capital above the minimum required level and implement less risky investment policy. However, the disciplining role of lower-of-cost-or-market accounting may discourage the bank from exerting project discovery effort ex-ante. From the regulator’s perspective, the accounting regime that maximizes the social welfare is determined by a tradeoff between the social cost of capital regulation and the efficiency of the bank’s project discovery efforts. When the former effect dominates, the regulator prefers lower-of-cost-or-market accounting; when the latter effect dominates, the regulator may prefer other regimes.     

城市商业银行跨区域经营:信贷扩张、风险水平及银行绩效

本文使用我国城市商业银行2004～2009年跨区域经营数据,首次对城市商业银行跨区域经营的相关问题进行了实证研究。结果发现,现阶段进行跨区域经营的城市商业银行中多是资产规模大、资本水平高、资产质量好、市场势力强的"好银行"。与只在本区域经营的银行相比,跨区域经营能有效分散投资风险,避免区域经济波动的风险,有益于降低银行风险水平。此外,跨区域经营的程度越高,银行的信贷增速越快、风险水平也显著降低。本文的这些发现为城市商业银行跨区域经营战略提供了经验支持,也为监管当局进一步改革监管政策提供了相关依据。     

Capital Market Regimes and Bank Structure in Europe

We hypothesize that fundamental features that distinguish European capital markets have predictably influenced emerging national differences in bank capitalization and loan growth. Using bank‐level data from 13 European countries, 1998 to 2004, we find evidence of positive effects of “equity‐friendly” market features on bank capitalization and positive effects of both “equity‐friendly” and “credit‐friendly” market features on loan growth. The findings are strongest in small banks and in banks with cooperative charters. Our results suggest that ongoing and prospective integration of European banking markets is mitigated by relatively static features of the equity and credit markets on which banks rely.     

Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks

The theory of financial intermediation highlights various channels through which capital and liquidity are interrelated. Using a simultaneous equations framework, we investigate the relationship between bank regulatory capital and bank liquidity measured from on-balance sheet positions for European and US publicly traded commercial banks. Previous research studying the determinants of bank capital buffer has neglected the role of liquidity. On the whole, we find that banks decrease their regulatory capital ratios when they face higher illiquidity as defined in the Basel III accords or when they create more liquidity as measured by Berger and Bouwman (2009). However, considering other measures of illiquidity that focus more closely on core deposits in the United States, our results show that small banks strengthen their solvency standards when they are exposed to higher illiquidity. Our empirical investigation supports the need to implement minimum liquidity ratios concomitant to capital ratios, as stressed by the Basel Committee; however, our findings also shed light on the need to further clarify how to define and measure illiquidity and also on how to regulate large banking institutions, which behave differently than smaller ones.     

Cyclical adjustment of capital requirements: A simple framework

We present a model of an economy with heterogeneous banks that may be funded with uninsured deposits and equity capital. Capital serves to ameliorate a moral hazard problem in the choice of risk. There is a fixed aggregate supply of bank capital, so the cost of capital is endogenous. A regulator sets risk-sensitive capital requirements in order to maximize a social welfare function that incorporates a social cost of bank failure. We consider the effect of a negative shock to the supply of bank capital and show that optimal capital requirements should be lowered. Failure to do so would keep banks safer but produce a large reduction in aggregate investment. The result provides a rationale for the cyclical adjustment of risk-sensitive capital requirements.     

First-move advantage in seasoned equity offerings: Evidence from European banks

The financial crisis that started in 2008 has generated significant losses for European banks, forcing them to undertake a series of seasoned equity offerings (SEOs) to reinforce their balance sheets in order to comply with regulatory capital requirements. As a result, they have produced repeated SEO waves in a relatively short time frame, when capital supply was limited due to the economic and financial context. We investigate the conditions at which European banks have been able to raise new equity capital by means of rights issues during the global financial crisis, demonstrating the existence of a first-move advantage: within a SEO wave, banks that acted first were able to complete the capital increase at more favorable conditions than their peers that acted later. We also show that first-movers experienced higher valuation ratios at the final cum-rights date compared to late-comers. As a result, first-movers obtained a double advantage: they could offer a lower discount on a price that embedded an higher valuation ratio.     

Assessing banks’ resilience: A complementary approach to stress testing using fair values from banks’ financial statements

For more than a decade, supervisory banking authorities in Europe and the United States have sought to assess the resilience of banks to adverse economic episodes to safeguard the financial system's stability. They rely on regulatory capital measures like Common Equity Tier 1 (CET1) relative to risk-weighted assets in the aftermath of potential economic crises. We propose a new measure of banks' resilience based on financial statements. The fair value margin (FVM) is estimated as the difference between the fair value of assets and the book value of liabilities, scaled by the book value of equity. We find that FVM is positively associated with the surplus or shortfall of CET1 resulting from the stress testing results from 2014, 2016 and 2018. To corroborate the relevance of FVM for supervisory authorities, we compare the ability of the loan component of FVM to predict future credit losses with the capital surplus/shortfall metric derived from the stress test. The findings indicate that the fair value of loans predicts net charge-offs better than stress test outcomes. Therefore, we suggest that FVM could be used as a readily available and relatively low-cost tool to assess bank resilience, thus complementing the stress test exercises.     

Capital changes at large affiliated banks

The federal bank regulators imposed numerical capital guidelines in December 1981. If these guidelines are binding, then banking organizations may respond to the costs of regulation in various ways. If the regulations are not binding, then further reliance may be placed on market discipline. This study develops two models of changes in the equity capital to assets ratio of large banks affiliated with bank holding companies—a regulatory model in which capital regulations are a binding influence and a market model in which financial markets influence capital ratios. The two models are examined empirically through a disequilibrium framework and maximum likelihood estimation techniques. The results suggest that most banks are predominantly influenced by regulatory forces. Federal Reserve Bank of Atlanta Florida State University