Journal of Financial Services Research

, Volume 34, Issue 2–3, pp 123–149 | Cite as

How Do Large Banking Organizations Manage Their Capital Ratios?

  • Allen N. Berger
  • Robert DeYoungEmail author
  • Mark J. Flannery
  • David Lee
  • Özde Öztekin


U.S. banks hold significantly more equity capital than required by their regulators. We test competing hypotheses regarding the reasons for this “excess” capital, using an innovative partial adjustment approach that allows estimated BHC-specific capital targets and adjustment speeds to vary with firm-specific characteristics. We apply the model to annual panel data for publicly traded U.S. bank holding companies (BHCs) from 1992 through 2006, an extended period of increasing bank capital that ended just before the subprime credit crisis of 2007–2008. The evidence suggests that BHCs actively managed their capital ratios (as opposed to passively allowing capital to build up via retained earnings), set target capital levels substantially above well-capitalized regulatory minima, and (especially poorly capitalized BHCs) made rapid adjustments toward their targets.


Banks Capital management Capital regulation Partial adjustment models 

JEL Classification

G21 G28 G32 


  1. Allen F, Carletti E, Marquez R (2006) Credit market competition and capital regulation. Finance and Economics Discussion Series, Federal Reserve Board, 2006-11Google Scholar
  2. Baltagi B (2001) Econometric analysis of panel data. Wiley, ChichesterGoogle Scholar
  3. Berger A (1995) The profit–structure relationship in banking—tests of market-power and efficient-structure hypotheses. J Money Credit Bank 27:404–431, doi: 10.2307/2077876 CrossRefGoogle Scholar
  4. Berger A, Bouwman C (2008) Financial crises and bank liquidity creation. University of South Carolina working paperGoogle Scholar
  5. Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87:115–144, doi: 10.1016/S0304-4076(98)00009-8 CrossRefGoogle Scholar
  6. Demsetz R, Saidenberg M, Strahan P (1996) Banks with something to lose: the disciplinary role of franchise value. Fed Reserve Bank N Y Econ Policy Rev 2(2):1–14Google Scholar
  7. Faulkender M, Flannery M et al (2008) Do adjustment costs impede the realization of target capital structure? Working paperGoogle Scholar
  8. Flannery M, Rangan K (2006) Partial adjustment toward target capital structures. J Financ Econ 79:469–506, doi: 10.1016/j.jfineco.2005.03.004 CrossRefGoogle Scholar
  9. Flannery M, Rangan K (2008) What caused the bank capital build-up of the 1990s? Rev Finance 12(2):391–429CrossRefGoogle Scholar
  10. Gale D, Ogur O (2005) Are bank capital ratios too high or too low? Incomplete markets and optimal capital structure. J Eur Econ Assoc 3:690–700Google Scholar
  11. Gropp R, Heider F (2007) What can corporate finance say about banks’ capital structures? European Central Bank working paperGoogle Scholar
  12. Hellmann T, Murdock K, Stiglitz J (2000) Liberalization, moral hazard in banking, and prudential regulation: are capital requirements enough? Am Econ Rev 90:147–165Google Scholar
  13. Keeley M (1990) Deposit insurance, risk, and market power in banking. Am Econ Rev 80:1183–1200Google Scholar
  14. Kisgen D (2006) Credit ratings and capital structure. J Finance 61:1035–1072, doi: 10.1111/j.1540-6261.2006.00866.x CrossRefGoogle Scholar
  15. Lemmon M, Roberts M, Zender J (2008) Back to the beginning: persistence and the cross-section of corporate capital structure. J Finance 63:1575–1608, doi: 10.1111/j.1540-6261.2008.01369.x CrossRefGoogle Scholar
  16. Marcus A (1984) Deregulation and bank financial policy. J Bank Finance 8:557–565, doi: 10.1016/S0378-4266(84)80046-1 CrossRefGoogle Scholar
  17. Myers S (1977) Determinants of corporate borrowing. J Financ Econ 5:147–175, doi: 10.1016/0304-405X(77)90015-0 CrossRefGoogle Scholar
  18. Myers S (1984) The capital structure puzzle. J Finance 39:575–592, doi: 10.2307/2327916 CrossRefGoogle Scholar
  19. Myers S, Majluf N (1984) Corporate financing and investment decisions when firms have information that investors do not have. J Financ Econ 13:187–221, doi: 10.1016/0304-405X(84)90023-0 CrossRefGoogle Scholar
  20. Peura S, Keppo J (2006) Optimal bank capital with costly recapitalization. J Bus 79:2163–2201, doi: 10.1086/503660 CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Allen N. Berger
    • 1
    • 2
    • 3
  • Robert DeYoung
    • 4
    Email author
  • Mark J. Flannery
    • 5
  • David Lee
    • 6
  • Özde Öztekin
    • 5
  1. 1.University of South CarolinaColumbiaUSA
  2. 2.Wharton Financial Institutions CenterPhiladelphiaUSA
  3. 3.CentERTilburg UniversityTilburgThe Netherlands
  4. 4.University of KansasLawrenceUSA
  5. 5.University of FloridaGainesvilleUSA
  6. 6.Federal Deposit Insurance CorporationWashingtonUSA

Personalised recommendations