How banks adjust capital ratios: the most recent empirical facts

How commercial banks adjust capital ratios: Empirical evidence from the USA?‎

“…This part provides the literature about the adjustment of capital. In recent literature, Abbas and Masood (2020a) explore the speed of adjustment for large commercial banks in the USA. The study concludes that commercial banks adjust their regulatory capital ratios faster than leverage ratios.…”

“…The panel-fixed effects unobserved heterogeneity includes the efficiency of management, risk behavior, economic conditions, financial and business freedom and governance of banks as well as of the country in which the financial intuition is in operation, which is the USA in this case. The inclusion of fixed effects in the capital adjustment model is supported by (Abbas & Masood, 2020a;Bakkar et al, 2019;Gropp & Heider, 2010). Putting the equation of required capital, equation 2, in equation 1and the specification would become like:…”

“…In this analysis, the focus is on leverage ratio, tier-I leverage ratio, regulatory ratio, tier-I regulatory ratio, common equity regulatory ratio, capital buffer ratio, tier-I buffer ratio, and common equity buffer ratio by following the prior studies (Abbas & Masood, 2020b;Bakkar et al, 2019;Jokipii & Milne, 2011;De Jonghe & Öztekin, 2015). The adjustment process is similar to the previous studies (Abbas & Masood, 2020a, 2020bBakkar et al, 2019;De Jonghe & Öztekin, 2015). Theoretically, this study is significant for investors interested in dividend income.…”

“…In this situation, one can think and expect the faster adjustment of the bank's regulatory ratios than capital buffer ratio and leverage ratios; other things remain constant. There may be a set of factors to use for the frictions of these capital ratios (Abbas & Masood, 2020a;De Jonghe & Öztekin, 2015). Here the banks can use their balance sheet to adjust their capital ratios as per their desires.…”

“…Due to this reason, our analysis provides an average speed of adjustment on an annual basis. We use the tendency of fluctuation in risk-weighted assets, liquidity level, absolute equity number, and retained earnings to examine the difference in the speed of adjustment in leverage ratio, regulatory ratio, and capital buffer ratio (Abbas & Masood, 2020a;Bakkar et al, 2019;De Jonghe & Öztekin, 2015).…”