Handbook of Financial Intermediation and Banking

CHAPTER 12 What Caused the Bank Capital Buildup of the 1990s?

Mark J. Flannery

University of Florida

Kasturi P. Rangan

Booz Allen Hamilton

1. Introduction

2. Determining a Bank’s Optimal Leverage

3. Rising U.S. Bank Capitalization, 1986–2001

3.1. The Supervisors’Focus: Book Capital Ratios

3.2. Investors’ Focus: Market Capital Ratios

3.3. BHC Portfolio Volatility and Default Risks

3.4. Possible Causes of the Increased Capitalization

4. Regression Model

4.1. Lags in Adjusting Toward Target Capitalization

4.2. Econometric Issues

4.3. Data

5. Estimation Results

5.1 Decomposing the Change in BHC Capitalization

6. Do Higher Market Ratios Reflect Stricter Regulatory Constraints?

7. Robustness

7.1. Adjust for Possible Safety Net Subsidies in MKTRAT ...