Estimating the Impact of the New Capital Requirements on the Cost of Bank Capital: An Empirical Study on European Banks.

2013 ◽  
Author(s):  
Oana Toader
Keyword(s):  
Empirical Study ◽  
Capital Requirements ◽  
Bank Capital ◽  
European Banks ◽  
The Cost ◽  
The Impact

scholarly journals Bank Capital and the Cost of Equity

2019 ◽  
Vol 19 (265) ◽  
Author(s):  
Mohamed Belkhir ◽  
Sami Ben Naceur ◽  
Ralph Chami ◽  
Anis Semet
Keyword(s):  
Capital Requirements ◽  
Equity Capital ◽  
Bank Capital ◽  
Regulatory Capital ◽  
Cost Of Equity ◽  
Percentage Point Increase ◽  
Point Increase ◽  
Negative Effect ◽  
The Cost ◽  
The Impact

Using a sample of publicly listed banks from 62 countries over the 1991-2017 period, we investigate the impact of capital on banks’ cost of equity. Consistent with the theoretical prediction that more equity in the capital mix leads to a fall in firms’ costs of equity, we find that better capitalized banks enjoy lower equity costs. Our baseline estimations indicate that a 1 percentage point increase in a bank’s equity-to-assets ratio lowers its cost of equity by about 18 basis points. Our results also suggest that the form of capital that investors value the most is sheer equity capital; other forms of capital, such as Tier 2 regulatory capital, are less (or not at all) valued by investors. Additionally, our main finding that capital has a negative effect on banks’ cost of equity holds in both developed and developing countries. The results of this paper provide the missing evidence in the debate on the effects of higher capital requirements on banks’ funding costs.

Capital Regulation and Bank Deposits*

2018 ◽  
Vol 23 (4) ◽  
pp. 831-853 ◽  
Author(s):  
Stefan Arping
Keyword(s):  
Recent Literature ◽  
Capital Requirements ◽  
Capital Regulation ◽  
Crowding Out ◽  
Bank Capital ◽  
Bank Deposits ◽  
Small Rise ◽  
The Cost

Abstract Recent literature suggests that higher capital requirements for banks might lead to a socially costly crowding out of deposits by equity. This paper shows that additional equity in banks can help to crowd in deposits. Intuitively, as banks have more equity and become safer, the cost of deposit funding may decline; this, in turn, can encourage banks to expand their deposits. However, I also find that, for this effect to occur, capital requirements may have to be stringent enough: When bank capital is low, a small rise in capital requirements can cause banks to substitute equity for deposits. Overall, a non-monotonic relationship between the required amount of equity in banks and their level of deposit funding obtains.

scholarly journals Recent Cost Increases: Their Future Impacts on Agriculture

1975 ◽  
Vol 7 (1) ◽  
pp. 71-79
Author(s):  
Wayne A. Boutwell ◽  
Thomas W. Little
Keyword(s):  
Agricultural Production ◽  
Agricultural Sector ◽  
Price Level ◽  
Capital Requirements ◽  
Farm Income ◽  
Agricultural Commodities ◽  
Domestic Prices ◽  
The Cost ◽  
The Impact ◽  
Input Prices

The impact of rapidly escalating input prices of farm income, agricultural production, production adjustments, the general price level, the cost of living and capital requirements in the agricultural sector is a source of increasing concern to farmers, suppliers of capital to agriculture, and consumers of agricultural products. Record prices for agricultural commodities, such as feed grains and soybeans, partially masked the effects of a 52 percent increase in the index of prices paid for production items on net farm income during the period 1971–74. As agricultural machinery and farm buildings are replaced, world stocks of agricultural commodities are replenished, and domestic prices begin to decline, the magnitude of these cost increases will become more apparent.

Bank capital and liquidity creation: evidence of relation from India

2017 ◽  
Vol 11 (2) ◽  
pp. 152-166 ◽  
Author(s):  
Muhammad Umar ◽  
Gang Sun ◽  
Muhammad Ansar Majeed
Keyword(s):  
Balance Sheet ◽  
Capital Requirements ◽  
Financial Fragility ◽  
Crowding Out ◽  
Bank Capital ◽  
Content Type ◽  
Crisis Period ◽  
Balance Sheet Liquidity ◽  
Indian Banks ◽  
The Impact

Purpose This study analyzes the impact of changes in bank capital on liquidity creation. More specifically, it tests “financial fragility – crowding out” and “risk absorption” hypotheses for Indian banks. Design/methodology/approach It uses the data of 136 listed and unlisted banks, ranging from the year 2000 to 2014. The analysis is based on panel data techniques. Findings There is negative relationship between narrow measure of bank liquidity creation and capital. Therefore, in the case of India, “financial fragility – crowding out” hypothesis holds for “cat nonfat” measure of liquidity creation. However, there is no relationship between “cat fat” measure of liquidity creation and capital, except for listed banks, and the banks in the pre-crisis period. In these two cases, “risk absorption” hypothesis holds. Furthermore, none of the hypotheses holds in the post-crisis period. Practical implications The higher capital requirements posed by the Basel III will result in lower on-balance-sheet liquidity creation, which may result in lower profitability for the banks. However, increase in capital does not affect off-balance-sheet liquidity creation, rather enhances it in case of listed banks. So, the managers may use risky off-balance-sheet liquidity creation to improve profitability. Therefore, the regulators must be vigilant to the off-balance-sheet activities of banks to avoid banking turmoil. Originality/value To the best of authors’ knowledge, this is the first study to explore which hypothesis regarding the relationship between bank capital and liquidity creation holds for Indian banks. It contributes to the existing literature by providing the empirical evidence that “financial fragility – crowding out” hypothesis holds for on-balance-sheet liquidity creation and “risk absorption” hypothesis holds for listed banks. It also points to the new direction that neither of the hypotheses holds in the post-crisis period in India.

scholarly journals The Impact of Market Discipline on Banks’ Capital Adequacy: Evidence From an Emerging Economy

2015 ◽  
Vol 4 (1) ◽  
pp. 61-73 ◽  
Author(s):  
Ayesha Afzal
Keyword(s):  
Perceived Risk ◽  
Banking System ◽  
Empirical Support ◽  
Market Discipline ◽  
Capital Adequacy ◽  
Risk Level ◽  
Bank Capital ◽  
The Cost ◽  
The Impact

This study presents empirical support for the role of market discipline in augmenting bank capital ratios in a competitive banking environment. Using a panel dataset on domestic commercial banks in Pakistan from 2009 to 2014, the study determines if the market penalized banks for any increase in their risk profile through a rise in the cost of raising funds. The results point to a significant relationship between capital adequacy and other risk factors, with the cost of deposits demonstrating how depositors align the required return to the perceived risk level of the bank. These findings have important implications for policymakers as market discipline could complement the role of regulators, which would eventually lower the cost of supervision. Moreover, the focus of international reforms as seen through the implementation of Basel III should continue to be on developing a more competitive and transparent banking system.

Are Risk-Based Capital Requirements Detrimental to Corporate Lending?

2018 ◽  
Author(s):  
Brunella Bruno ◽  
Giacomo Nocera ◽  
Andrea Resti
Keyword(s):  
Asset Allocation ◽  
Business Models ◽  
Capital Requirements ◽  
Financial Repression ◽  
European Banking ◽  
European Banks ◽  
Corporate Loan ◽  
Capital Regulations ◽  
Asset Allocations ◽  
The Impact

In this chapter, we summarize the main results of a recent empirical research concerning European banks. We first explore the main drivers of the differences in risk-weighted assets (RWAs) across a sample of fifty large European banking groups. We then assess the impact of RWA-based capital regulations on those banks’ asset allocations in 2008–14. We find that risk weights are affected by bank size, business models, and asset mix. We also find that the adoption of internal ratings-based (IRB) approaches is an important driver of RWAs and that national segmentations explain a significant (albeit decreasing) share of the variability in risk weights. As for the impact of internal ratings on banks’ asset allocation in 2008–14, we uncover that banks using IRB approaches more extensively have reduced more (or increased less) their corporate loan portfolio. This effect is somewhat stronger for banks located in Eurozone periphery countries during the 2010–12 sovereign crisis. We do not find evidence, however, of internal models producing a reallocation from corporate loans to government exposures, suggesting that other motives prevailed in driving banks towards sovereign bonds during the Eurozone sovereign crisis, including the so-called ‘financial repression’ channel.

scholarly journals Capital Structure and Bank Profitability in Vietnam: A Quantile Regression Approach

2020 ◽  
Vol 13 (8) ◽  
pp. 168 ◽  
Author(s):  
Tu D. Q. Le ◽  
Dat T. Nguyen
Keyword(s):  
Capital Structure ◽  
Quantile Regression ◽  
Banking System ◽  
Capital Requirements ◽  
Bank Capital ◽  
Bank Profitability ◽  
Continuous Increase ◽  
Regression Approach ◽  
The Impact ◽  
Quantile Regression Method

We empirically investigate the impact of capital structure on bank profitability using a quantile regression method in the Vietnamese banking system during 2007–2019. Our results suggest that the nonlinear relationship between capitalization and bank profitability is only significant at the 90th quantile. This is the first study to conclude that the turning point of capital ratio increases throughout the profitability distribution. Our findings thus suggest that a continuous increase in bank capital requirements does not necessarily result in higher bank profitability.

LONGEVITY RISK MANAGEMENT AND SHAREHOLDER VALUE FOR A LIFE ANNUITY BUSINESS

2016 ◽  
Vol 47 (1) ◽  
pp. 43-77 ◽  
Author(s):  
Craig Blackburn ◽  
Katja Hanewald ◽  
Annamaria Olivieri ◽  
Michael Sherris
Keyword(s):  
Risk Management ◽  
Shareholder Value ◽  
Capital Requirements ◽  
Demand Elasticity ◽  
Longevity Risk ◽  
Risk Transfer ◽  
Life Annuity ◽  
Life Insurer ◽  
The Cost ◽  
The Impact

AbstractThe life annuity business is heavily exposed to longevity risk. Risk transfer solutions are not yet fully developed, and when available they are expensive. A significant part of the risk must therefore be retained by the life insurer. So far, most of the research work on longevity risk has been mainly concerned with capital requirements and specific risk transfer solutions. However, the impact of longevity risk on shareholder value also deserves attention. While it is commonly accepted that a market-consistent valuation should be performed in this respect, the definition of a fair shareholder value for a life insurance business is not trivial. In this paper, we develop a multi-period market-consistent shareholder value model for a life annuity business. The model allows for systematic and idiosyncratic longevity risk and includes the most significant variables affecting shareholder value: the cost of capital (which in a market-consistent setting must be quantified in terms of frictional and agency costs, net of the value of the limited liability put option), policyholder demand elasticity and the cost of alternative longevity risk management solutions, namely indemnity-based and index-based solutions. We show how the model can be used for assessing the impact of different longevity risk management strategies on life insurer shareholder value and solvency.

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