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How commercial banks adjust capital ratios: Empirical evidence from the USA?‎

Author

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  • Faisal Abbas
  • Shoaib Ali
  • Imran Yousaf
  • Sohail Rizwan

Abstract

This study examines the speed of adjustment of the leverage and regulatory capital ratios between 2002 and 2018 for large commercial banks of the USA. The study applies a two-step system GMM technique to obtain the speed of adjustment. The results prove that higher-quality capital requires greater time to restore equilibrium after an economic shock. The results also show that large commercial banks adjust their regulatory ratios faster than leverage ratios. Furthermore, the speed of adjustment is heterogeneous for cross-sections. The speed of adjustment for well-capitalized banks is higher than adequately and undercapitalized commercial banks. The speed of adjustment for highly liquid is higher than low liquid banks. This study also finds the banks quickly adjust their capital before the crisis period. The heterogeneous results have implications for regulators, policymakers, and bank managers for better decision making.

Suggested Citation

  • Faisal Abbas & Shoaib Ali & Imran Yousaf & Sohail Rizwan, 2020. "How commercial banks adjust capital ratios: Empirical evidence from the USA?‎," Cogent Business & Management, Taylor & Francis Journals, vol. 7(1), pages 1859848-185, January.
    • Handle: RePEc:taf:oabmxx:v:7:y:2020:i:1:p:1859848
    DOI: 10.1080/23311975.2020.1859848
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    Citations

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    Cited by:

    1. Nathaniel Blankson & Godfred Amewu & Kenneth Ofori-Boateng & Kwame Adanu, 2022. "Banking reforms, efficiency and competition: new empirical evidence from a panel vector autoregressive analysis of Ghanaian banks," SN Business & Economics, Springer, vol. 2(5), pages 1-24, May.
    2. ABBAS Faisal, 2021. "Impact Of Investment, Financial And Trade Freedom On Bank’S Risk-Taking," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 16(3), pages 5-23, December.
    3. Faisal Abbas & Shoaib Ali & Imran Yousaf & Wing-Keung Wong, 2021. "Dynamics of Funding Liquidity and Risk-Taking: Evidence from Commercial Banks," JRFM, MDPI, vol. 14(6), pages 1-16, June.
    4. Albina Kalimashi & Driton Balaj, 2023. "COVID-19 Impact on the Capital Structure of Commercial Banks: Evidence from the Western Balkans," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 76-88.
    5. Faisal Abbas & Shoaib Ali, 2022. "Is Economic Freedom a Moderator of the Relationship Between Bank Capital and Profitability?," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 69(2), pages 273-292, June.
    6. Faisal Abbas & Zahid Irshad Younas, 2021. "How Do Bank Capital and Capital Buffer Affect Risk: Empirical Evidence from Large US Commercial Banks," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(2), pages 109-131.
    7. Khalil Ullah Mohammad & Mohsin Raza Khan, 2021. "Bank Capital Structure Dynamics and Covid-19: Evidence from South Asia," iRASD Journal of Economics, International Research Alliance for Sustainable Development (iRASD), vol. 3(3), pages 293-304, December.

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