Why do banks hold capital in excess of regulatory requirements?

Diemo Dietrich/Uwe Vollmer

共14页

This paper explains why banks hold a capital ratio in excess of regulatory requirements. We demonstrate that banks can use capital ratios as a strategic tool for renegotiating loans with borrowers. Since the ability of banks to commit to a harsh treatment of borrowers depends on the capital ratio in a non-monotonic way, a bank may be
forced to exceed capital requirements.

1. Introduction

2. Determinants of a bank’s capital structure
2.1. Financial contracts with the risk of renegotiation break down

2.2. Bank finance

3. Effects of minimum capital adequacy ratios

4. Pro-cyclicality of bank lending

5. Concluding remarks