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Bank Capital Requirements and Capital Structure

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Author Info
John P. Harding (University of Connecticut)
Xiaozhong Liang (State Street Corporation)
Stephen L. Ross (University of Connecticut)

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Abstract

This paper studies the impact of capital requirements, deposit insurance and tax benefits on a bank's capital structure. We find that properly regulated banks voluntarily choose to maintain capital in excess of the minimum required. Central to this decision is both tax advantaged debt (a source of firm franchise value) and the ability of regulators to place banks in receivership stripping equity holders of firm value. These features of our model help explain both the capital structure of the large mortgage Government Sponsored Enterprises and the recent increase in risk taking through leverage by financial institutions.

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File URL: http://www.econ.uconn.edu/working/2009-09.pdf
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File Function: Full text
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Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2009-09.

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Length: 41 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:uct:uconnp:2009-09

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Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
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Related research
Keywords: Banks; Capital Structure; Capital Regulation; Financial Intermediation; Leverage; GSE; Investment Banks;

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
M48 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Government Policy and Regulation

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This page was last updated on 2009-10-28.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.