Financing Choices of Banks: The Role of Non-Binding Capital Requirements

Topics:
Commercial Banking,
Investment and Capital Markets
Tags:
Bank,
Bank For International Settlements,
Finance,
Financial Accounting,
Financial Services,
Financing,
Investment
Source:
Bank for International Settlements

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Overview: This paper presents a model of the financing choices (debt v. equity) of banking institutions. It emphasizes the interplay of two well-known factors in corporate financing, namely risk-shifting incentives and growth opportunities. The model provides a new interpretation of the role of capital requirements, recognizing that banks may not operate at the maximal leverage levels allowed. The role of capital requirement lies in restricting the equilibrium selection. By cutting of the global optimum, capital requirements constrain the majority of banks to stay at their local optima.

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Format: PDF | Size: 313KB | Date: May 2004 | Pages: 32

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