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

Faisal Abbas,Shoaib Ali,Sohail Rizwan,Imran Yousaf,David Mcmillan

doi:10.1080/23311975.2020.1859848

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 techni...

Highlights

Following the financial crisis of 2007–2009, regulators announced extensive reforms to the finan cial institution’s guidelines, in particular by remodeling the currently prevalent base of the capital required
This study aims to explore the speed of adjustment of leverage and regulatory ratios of large commercial banks over a prolonged period from 2002 to 2019
The study uses a two-step system generalized method of moments (GMM) approach to trace a pace of adjustment for different capital ratios

Summary

Introduction

Following the financial crisis of 2007–2009, regulators announced extensive reforms to the finan cial institution’s guidelines, in particular by remodeling the currently prevalent base of the capital required. The motivation stems from the most recent development of Basel III regarding the requirement of a higher amount in capital for the stability of the financial system to face unexpected economic shocks. In this analysis, the focus is on leverage ratio, tier-I leverage ratio, regulatory ratio, tier-I regulatory ratio, common equity regulatory ratio, capital buffer ratio, tier-I buffer ratio, and common equity buffer ratio by following the prior studies (Abbas & Masood, 2020b; Bakkar et al, 2019; Jokipii & Milne, 2011; De Jonghe & Öztekin, 2015).

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