The aim of this paper is to analyse how banking firms set their capital ratios, that is, the rate of equity capital over assets. In order to study this issue, two theoretical models are developed. Both models demonstrate the existence of an optimal capital ratio; the first one for firms not affected by capital adequacy regulation, the second one for firms which are. The models have been tested by estimating a disequilibrium model using data from Spanish commercial banks

This paper investigates utilization of discretionary accounting practices in the context of international bank regulation under the Basle Accord. Specifically, we explore implications of earnings management as a means of regulatory-capital arbitrage by Japanese banks during a period of financial duress, 1989–1996. Using a sample of 607 pooled time series and cross-sectional observations, we find evidence that Japanese banks’ lending was capital constrained, and that banks set gains on securities sales and loan-loss provisions in such a way as to smooth reported income and replenish regulatory capital. Our results support the hypothesis that the form of earnings management examined may have been instrumental in enabling some Japanese banks to comply with international capital regulation. We contend that this behavior is otherwise inexplicable on the basis of significant informational, tax or economic motivations

This paper tests empirical associations between banking market structure, banking regulation, and subsequent growth rates in local real per capita personal income. Our findings suggest that out-of-market bank mergers or acquisitions need not, ceteris paribus, impair local economic growth, and may even have beneficial effects in rural markets with the possible exception of farm-dependent areas. These findings derive from empirical models that relate both short-run and long-run growth rates to geographic restrictions on bank activity, concentration in local banking markets, in-market versus out-of-market ownership of local bank offices, and in-market versus out-of-market control of local bank deposits

We examine the response of domestic Philippine banks to the relaxation of foreign entry regulations that occurred in the Philippines. We find evidence that foreign bank entry is associated with a reduction in interest rate spreads and bank profits, but only for those domestic banks that are affiliated to a family business group. Foreign entry corresponds more generally with improvements in operating efficiencies, but a deterioration of loan portfolios. Overall, we conclude that foreign competition compels domestic banks to be more efficient, to focus operations due to increased risk, and to become less dependent on relationship-based banking practices

This paper analyzes inspection and closure policies of a bank, and the strategic reaction of its managers/shareholders when they can (costly) manipulate the information available to the regulator. We derive optimal intervention policy, and analyze its effect on managerial strategies. Regulatory intervention may induce shareholders to manipulate the information available to the regulator in order to avoid intervention and closure, and we find that these incentives to manipulate information may increase with tighter capital requirements. Finally we show that, in order to avoid manipulation by the banker, some degree of forbearance in closure may be ex ante optimal

Only recently the debate on bank capital regulation has devoted specific attention to the role that bank loan loss provisions can play as a part of the overall capital regulatory framework. This paper contributes to the ongoing debate by demonstrating empirically that loan loss provisioning needs to be an integral component of capital regulation. We find empirical evidence that many banks around the world delay provisioning for bad loans until too late, when cyclical downturns have already set in, thereby magnifying the impact of the economic cycle on banks' income and capital

The merit of international convergence of bank capital requirements in the presence of divergent closure policies of different central banks is examined. The lack of a complementary variation between minimum bank capital requirements and regulatory forbearance leads to a spillover from more forbearing to less forbearing economies and reduces the competitive advantage of banks in less forbearing economies. Linking the central bank's forbearance to its alignment with domestic bank owners, it is shown that in equilibrium, a regression toward the worst closure policy may result: The central banks of initially less forbearing economies also adopt greater forbearance

This paper investigates the effect of daily management of Federal Reserve accounts by US depository institutions on the interest rate outside the US. Spindt and Hoffmeister (Journal of Financial and Quantitative Analysis 23 (1988) 401), Griffiths and Winters (Journal of Banking and Finance 19 (1995) 1265) and Hamilton (Journal of Political Economy 104 (1996) 22) found that the Fed funds rate exhibited calendar day effects caused by Federal Reserve regulations. I find that the overnight Eurodollar rate shows similar predictable daily changes as does the Fed funds rate although the absolute magnitudes are slightly less. The empirical results support the hypothesis that the tendencies in daily changes in the two overnight interest rates are caused by the characteristics of the Fed funds market

We survey the most recent BIS proposals for the credit risk measurement of retail credits in capital regulations. We also describe the recent trend away from relationship lending toward transactional lending in the small business loan arena. These trends create the opportunity to adopt more analytical, data-based approaches to credit risk measurement. We survey proprietary credit scoring models (such as Fair Isaac), as well as options-theoretic structural models (such as KMV and Moody’s RiskCalc), and reduced-form models (such as Credit Risk Plus). These models allow lenders and regulators to develop techniques that rely on portfolio aggregation to measure retail credit risk exposure

Motivated by the potential for opportunistic behavior in pay decisions, recent SEC and IRS regulations essentially preclude inside directors from serving on a firm’s compensation committee (CC). We examine whether greater CC independence promotes shareholder interests and whether the CEO’s presence on the CC leads to opportunistic pay structure. We find little evidence that greater committee independence affects executive pay. Moreover, committees consisting of insiders or the CEO do not award excessive pay or lower overall incentives. For example, we find no evidence that pay decreases or total incentives increase when CEOs come off the CC. Our results suggest that regulations governing committee structure may not reduce levels of pay or achieve efficiencies in incentive contracts