Optimal Bank Capital with Costly Recapitalization*

How Do Large Banking Organizations Manage Their Capital Ratios?

“…Peura and Keppo (2006) model the bank capital decision as a dynamic tradeoff between the opportunity cost of equity and the loss of franchise value.) Finally, asset size may affect banks' preferred capital ratios.…”

The cyclical effects of the Basel II capital requirements

“…probability p will be higher for the log-normal distribution owing to fat tails. Since the standard deviation of the distribution might vary between large and small banks (Peura and Keppo, 2006), I used the cross-sectional empirical standard deviation of each of the respective size classes. All in all, the results show reasonable probability values.…”

Simulation based stress tests of banks' regulatory capital adequacy

“…Estrella, 2001;Milne and Whalley, 2001;or Peura and Keppo, 2003). a would be influenced by factors such as the costs and penalties associated with a violation of the regulatory capital requirement (1), the capital market frictions that affect the recapitalization of the bank, the sensitivity of the bank's funding cost to the amount of capital held by the bank, and the availability of growth options to the bank.…”

“…There is by now a lot of theoretical research which shows that banks optimally hold buffer stocks of capital to protect against the adverse consequences of running out of capital (Estrella, 2001;Furfine, 2001;Hojgaard and Taksar, 1999;Milne and Robertson, 1996;Milne and Whalley, 2001;Peura and Keppo, 2003). This research utilizes stylized models where banks with illiquid portfolios optimize their capital levels subject to minimum capital or liquidity constraints.…”

“…The research shows that the precautionary capital stocks are the larger the more severe are the financial constraints and the more illiquid or costly to hedge are bank assets. Some of these models have also been calibrated to data on actual bank returns, in an attempt to find out whether the models can explain observed bank capital ratios (Peura and Keppo, 2003). 2 This raises the question of whether the same models could be used 1 Basel Committee (2002a) states that Ôto help address potential concerns about the cyclicality of the IRB approaches, the Committee agreed that meaningfully conservative credit risk stress testing by banks should be a requirement under the IRB approaches as a means of ensuring that banks hold a sufficient capital buffer under Pillar 2 of the new Accord'.…”