eBangor

Banking Competition and Capital Ratios

Schaeck, K. and Cihak, M. (2013) Banking Competition and Capital Ratios. European Financial Management, 18 ((5)). pp. 836-866. DOI: 10.1111/j.1468-036X.2010.00551.x

Full-text not available from this repository..

Abstract

Empirical studies provide evidence that bank capital ratios exceed regulatory requirements. But why do banks maintain capital levels above regulatory requirements? We use data for more than 2,600 banks from 10 European countries to test recent theories suggesting that competition incentivises banks to maintain higher capital ratios. These theories also predict that banks that engage in arm's length lending have lower capital ratios, and that shareholder rights and deposit insurance characteristics affect capital ratios. Consistent with these theories, our evidence robustly indicates that competition increases capital holdings. Banks that lend at arm's length exhibit lower capital ratios, whereas banks in countries with strong shareholder rights operate with higher capital ratios. We also show some evidence that generous deposit protection schemes that exclude non-deposit creditors are associated with higher capital ratios. Our results have important policy implications. First, while the traditional view suggests imposing restrictions on bank activities in order to restrain competition, our analysis indicates the opposite, even after adjusting the regressions for risk-taking. Second, weak shareholder rights undermine market forces that would otherwise encourage banks to hold higher capital ratios.

Item Type: Article
Subjects: Research Publications
Departments: College of Business, Law, Education and Social Sciences > Bangor Business School
Date Deposited: 09 Dec 2014 16:44
Last Modified: 23 Sep 2015 03:07
ISSN: 1468-036X
URI: http://e.bangor.ac.uk/id/eprint/920
Identification Number: DOI: 10.1111/j.1468-036X.2010.00551.x
Publisher: Unknown
Administer Item Administer Item

eBangor is powered by EPrints 3 which is developed by the School of Electronics and Computer Science at the University of Southampton. More information and software credits.