How banks adjust capital ratios: the most recent empirical facts

Abstract

This paper aims to explore the behavior of major regulated commercial banks. The study is aimed to examine that how these banks adjust their leverage and regulatory ratios by applying a two-step GMM framework. The Utilization of asset growth facilitates well-capitalized banks to restore their intended capital ratio and under-capitalized banks use equity and earnings to achieve equilibrium. Findings showed that large commercial banks adjust their legislative capital ratio faster than leverage. The differential effect suggested that well-capitalized banks required less time to manage equilibrium than those of adequately capitalized banks. The Under-capitalized banks took more time than those of adequately capitalized banks to reach their targeted capital level. The findings also indicated that banks in the post-crisis setting adjusted their leverage level more rapidly than the pre-crisis period. The risk-based capital ratio is lower than in the pre-crisis era. Findings were obtained from the samples of different U.S. banks covering the period from 2002 to 2018. The results of this study have economic relevance for policy implications and future regulations.

Keywords

• leverage ratio
• risk-based capital ratio
• tier-i ratio and speed of adjustment