Description

This paper examines the role of bank capital in decision-making by bank holding companies
(BHCs) in the United States. Following Chami and Cosimano’s (2001) call option approach
to bank capital, BHCs optimally choose the amount of capital to insure the bank against
becoming capital constrained in the future. We provide empirical support for this model, and
find that a higher optimal level of capital leads to higher loan rates. Furthermore, higher loan
rates result in lower amounts of lending. Thus, an increase in capital requirements is likely to
lead to higher loan rates and a significant reduction in lending.

More publications in this series: Working Papers

More publications by: Adolfo Barajas ; Thomas F. Cosimano ; Dalia Hakura ; Sebastian Roelands