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Bank Capital Structure, Regulatory Capital, and Securities Innovations

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  • Benston, George, et al

Abstract

Since late 1993, nonfinancial corporations have used financial instruments that permit them to treat preferred-stock dividends as tax-deductible interest. Bank holding companies (BHCs), however, did not issue these trust-preferred securities (TPS) until 1996, when the Federal Reserve qualified them as Tier-1 capital. We delineate and test five, not mutually exclusive, hypotheses by: (l) analyzing the stock-market's reaction to the Fed's ruling and to TPS filings and (2) comparing BHCs that issued TPS with those that did not. We find that regulatory capital requirements, tax savings, and uninsured sources of funds had significant positive effects on BHCs' demand for capital and that the market responded favorably to TPS filings. Our event-study findings are contrary to prior empirical results in that we find a positive market reaction to equity offerings.

Suggested Citation

  • Benston, George, et al, 2003. "Bank Capital Structure, Regulatory Capital, and Securities Innovations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 301-322, June.
    • Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:3:p:301-22
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    Cited by:

    1. Lamont K. Black & Ioannis Floros & Rajdeep Sengupta, 2016. "Raising capital when the going gets tough: U.S. bank equity issuance from 2001 to 2014," Research Working Paper RWP 16-5, Federal Reserve Bank of Kansas City.
    2. Balasubramnian, Bhanu & Cyree, Ken B., 2014. "Has market discipline on banks improved after the Dodd–Frank Act?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 155-166.
    3. Gilani, Usman & Keasey, Kevin & Vallascas, Francesco, 2021. "Board financial expertise and the capital decisions of US banks," Journal of Corporate Finance, Elsevier, vol. 71(C).
    4. Nicole Boyson & Rüdiger Fahlenbrach & René M. Stulz, 2014. "Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities," NBER Working Papers 19984, National Bureau of Economic Research, Inc.
    5. Cristina Pereira Pedro & Joaquim J. S. Ramalho & Jacinto Vidigal Silva, 2018. "The main determinants of banking crises in OECD countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 203-227, February.
    6. Bulusu, Narayan, 2024. "Disentangling the supply and announcement effects of open market operations," Journal of Financial Markets, Elsevier, vol. 67(C).
    7. Harald Benink & George Benston, 2005. "The Future of Banking Regulation in Developed Countries: Lessons from and for Europe," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 14(5), pages 289-328, December.
    8. Hongyan Geng & Maoyong Cheng & Junrui Zhang, 2021. "Effects of wealth management products on bank risk in China: The role of audit committee effectiveness," Pacific Economic Review, Wiley Blackwell, vol. 26(5), pages 575-616, December.
    9. Balasubramnian, Bhanu & Cyree, Ken B., 2011. "Market discipline of banks: Why are yield spreads on bank-issued subordinated notes and debentures not sensitive to bank risks?," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 21-35, January.
    10. Kallberg, Jarl & Liu, Crocker H. & Villupuram, Sriram, 2013. "Preferred stock: Some insights into capital structure," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 77-86.

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