Economics of capital adjustment in the US commercial banks: empirical analysis

Abstract

Using GMM framework on the data of the US commercial banks spanning over 2002 to 2018, this study shows that banks adjust their regulatory capital ratios faster than traditional capital ratios. Our results show that the speed of adjustment of regulatory capital ratios and traditional capital ratios increases in bank capital adequacy and bank liquidity, respectively. We also find that the speed of adjustment of regulatory capital ratios of too-big-to-fail banks is lower than well-capitalized, adequately-capitalized, nationally-chartered, and state-chartered banks. In addition, the speed of adjustment of regulatory capital ratios of commercial banks is higher in the post-crisis period than the pre-crisis era. Although scholars suggest that adjustment of capital ratios through rebalancing liabilities is more beneficial to the banks, our findings show that banks also use their assets side of balance sheet to rebalance their capital ratios.

Leverage and regulatory capital ratios in Japan

“…Merkl and Stolz (2009) analysed quarterly data from German financial institutions and found that smaller banks with lower capital buffers aggressively reduce lending compared to large banks with larger capital Leverage and regulatory capital ratios buffers. Abbas et al (2021a) examined state-chartered member and non-member banking institutions using annual data from 2002 to 2018. They calculated the rate of adjustment through a partial adjustment model within a dynamic framework, demonstrating that US banks exhibit varying rates of adjustment in their regulatory and non-regulatory capital ratios.…”

“…According to Memmel and Raupach (2010), large banks are responsible for reduced liquidity in the market, whereas they do not respond to financial loss. Abbas et al (2021a) report that the rate of readjustment is found to be diverse among toobig-to-fail banks throughout the United States, as well as well-capitalised, under-capitalised and domestically chartered institutions. According to the findings presented by Abbas and Masood (2020), the involvement of capital plays an important part in determining the liquidity and performance of financial institutions in the US industry.…”

“…Moreover, the performance of large and medium-sized banks is improved when they increase their capital. Abbas et al (2021a) investigate the US commercial banks and conclude that capital adjustment varies across pre, amid and post-GFC-2008 conditions. The preceding debate demonstrates that market conditions influence the speed of adjustment of capital; however, the findings are contradictory and mixed, which motivates us to formulate the following hypothesis.…”

“…Following the existing studies (Abbas et al, 2021a;Bakkar et al, 2023), we have used the partial adjustment model to assess the speed of adjustment across various capital ratios (leverage, regulatory capital, tier-I capital and common equity ratio), which is as follows:…”

“…However, studies on whether banks adjust their capital ratios and the speed of capital adjustment in the aftermath of the crisis still lack in banking literature. Recent studies (Abbas et al, 2021a;Bakkar et al, 2023;Cohen and Scatigna, 2016;Jokipii and Milne, 2011;Zhou et al, 2016) have empirically examined the capital adjustment process, and its determinants are scant and inconclusive. In particular, the questions about the speed of capital adjustment to restore banks' equilibrium capital ratios and the factors influencing the speed of capital adjustment are the major question marks for regulators, policymakers and bank managers.…”