How do large commercial banks adjust capital ratios: empirical evidence from the US?

Figures & data

Table

Overall sample	899
Well-capitalized Banks	139 (Risk-based capital ratio > 10%)
Adequately-capitalized banks	103 (Risk-based capital ratio < 10% and = 8%)
Undercapitalized Banks	241 (Risk-based capital ratio < 8% and =6%)
Significantly undercapitalized banks	416 (Risk-based capital ratio < 6%)
High liquid banks	477 (Based on Liquid Ratio)
Low liquid banks	452 (Based on Liquid Ratio)

Table 1A. Panel descriptive statistics.

Variable	Obs	Mean	S.D	P^5	P^25	P^75
Capital Ratio (TCAPR)	14396	.102	.018	.078	.087	.115
Risk-based capital ratio (TRBCR)	14396	.141	.027	.108	.119	.159
Buffer capital ratio (BTRBCR)	14396	.059	.021	.033	.039	.079
Tier-I Capital ratio (TITA)	14396	0.09	.020	.072	.081	.104
Tier-I Risk-based ratio (TIRBCR)	14396	0.13	.020	.104	.108	.148
Tier-I Buffer ratio (BTIRBCR)	14396	0.07	.019	.043	.047	.087
Profitability (ROA)	14396	.01	.005	−.001	.006	.013
Credit Risk (ALLGL)	14396	.014	.004	.008	.011	.017
Liquidity (LTOD)	14396	.822	.16	.501	.713	.938
Bank Efficiency (BE)	14396	3.048	1.756	.905	1.72	3.94
Income diversification (INDIV)	14396	.463	.098	.261	.407	.540
Market Power (MP)	14396	.139	.271	.022	0.027	.109
Asset diversification (AD)	14396	.58	.031	.518	.557	.606
Industrial development (INDD)	14396	.073	.075	.023	.028	.109
Bank SIZE	14396	13.554	.95	12.2	12.8	14.1
Financial freedom (FFINDX)	14396	78.235	8.565	70	70	90
Investment freedom (INVFINDX)	14396	73.824	5.009	70	70	80
Inflation rate	14396	1.92	.665	.759	1.54	2.06
Economic cycle (RGDPR)	14396	2.084	1.038	−.291	1.67	2.81

Table 1B. A Yearly distribution of total capital ratio, risk-based capital ratio and buffer ratio.

Year	TCAPR	TRBCR	BTRBCR
2002	0.0962	0.1358	0.0547
2003	0.0965	0.1371	0.0557
2004	0.0966	0.1354	0.0542
2005	0.0975	0.1345	0.0536
2006	0.0980	0.1332	0.0525
2007	0.0983	0.1309	0.0507
2008	0.0987	0.1307	0.0504
2009	0.0992	0.1367	0.0555
2010	0.1013	0.1440	0.0618
2011	0.1053	0.1495	0.0764
2012	0.1032	0.1507	0.0674
2013	0.1011	0.1509	0.0661
2014	0.0975	0.1509	0.0631
2015	0.0974	0.1449	0.0625
2016	0.9064	0.1439	0.0615
2017	0.0932	0.1461	0.0613
2018	0.0919	0.1446	0.0601

Source: Author’s Calculations by using Stata.

Table 2. Pairwise correlations matrix.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)	(15)	(16)
TCAPR	1.00
TRBCR	0.50*	1.00
BTRBCR	0.48*	0.98*	1.00
ROA	0.08*	0.07*	0.06*	1.00
ALLGL	0.09*	0.18*	0.19*	−0.06*	1.00
LTOD	0.01	−0.40*	−0.40*	0.03*	−0.18*	1.00
BE	−0.06*	−0.08	0.01	−0.48*	0.02*	−0.02*	1.00
INDIV	0.11*	0.08*	0.08*	0.58*	−0.09*	−0.09*	−0.21*	1.00
MP	0.010	−0.02*	−0.02*	0.03*	0.04*	−0.03*	−0.02*	0.11*	1.00
AD	−0.05*	0.27*	0.28*	0.05*	0.04*	−0.59*	−0.02*	0.12*	−0.03*	1.00
INDD	−0.01	−0.11*	−0.11*	0.011	−0.06*	0.05*	−0.02*	0.11*	−0.05*	0.03*	1.00
Bank SIZE	0.12*	−0.10*	−0.10*	−0.03	0.05*	0.08*	−0.03*	0.31*	0.10*	0.02*	0.45*	1.00
FFINDX	−0.21*	−0.20*	−0.21*	0.11*	−0.17*	0.08*	−0.10*	−0.12*	−0.09	0.05*	0.07*	−0.26*	1.00
INVFINDX	0.04*	−0.04*	−0.04*	−0.22*	−0.04*	0.11*	0.01	−0.11*	0.03	−0.08*	−0.05*	0.11*	−0.11*	1.00
INFRATE	−0.10*	−0.11*	−0.12*	0.16*	−0.17*	0.07*	−0.10*	−0.03*	−0.06	0.02*	0.02*	−0.14*	0.52*	−0.11*	1.00
RGDPR	0.02*	0.04*	0.04*	0.16*	−0.11*	−0.03*	−0.09*	0.21*	0.01	0.03*	0.04*	−0.02*	0.19*	−0.38*	0.46*	1.00

Source: Author's Calculations by using Stata. * shows significance at the .01 level.

Table 3. A two-step system GMM results: Dependent variables: total capital ratio (TCAPR), total risk-based capital ratio (TRBCR) and buffer capital ratio (BTRBCR).

	Overall Sample Banks			Well-capitalized Banks
	(1)	(2)	(3)	(4)	(5)	(6)
VARIABLES	TCAPR	TRBCR	BTRBCR	TCAPR	TRBCR	BTRBCR
Lagged. Dependent	0.798***	0.733***	0.710***	0.739***	0.696***	0.670***
	(0.0312)	(0.0402)	(0.0363)	(0.154)	(0.111)	(0.104)
Profitability	−0.205*	−0.804***	−0.694***	0.217	0.0876	−0.434
	(0.119)	(0.221)	(0.177)	(0.407)	(0.422)	(0.388)
Credit Risk	0.224***	0.664***	0.553***	0.359***	0.640***	0.465***
	(0.0285)	(0.0496)	(0.0412)	(0.126)	(0.122)	(0.158)
Liquidity	0.0084***	−0.0120***	−0.0100***	0.0048	−0.0021	−0.0007
	(0.0013)	(0.0025)	(0.0018)	(0.0029)	(0.0031)	(0.0033)
Bank Efficiency	−0.0002	−0.0007***	−0.0006***	0.0005	−0.0005	−0.0006
	(0.0001)	(0.0002)	(0.0002)	(0.0005)	(0.0004)	(0.0004)
Income Diversification	0.0132***	0.0357***	0.0302***	−0.0026	0.0062	0.0088**
	(0.0041)	(0.0078)	(0.0062)	(0.0025)	(0.0049)	(0.0043)
Market Power	−0.0005	−0.0004	−0.0002	0.0003	−0.0004	0.0014
	(0.0007)	(0.0012)	(0.0009)	(0.0019)	(0.0025)	(0.0033)
Assets Diversification	0.0165***	0.0262***	0.0248***	−0.0011	0.0153**	0.0206***
	(0.0055)	(0.0099)	(0.0083)	(0.0035)	(0.0062)	(0.0061)
Industry Development	−0.0001	0.0012	0.0007	0.0075	0.0119	0.0132
	(0.0017)	(0.0028)	(0.0024)	(0.0096)	(0.0081)	(0.0088)
Bank Size	−0.0002	−0.0023***	−0.0019***	0.0001	0.00038	0.0012
	(0.00022)	(0.0005)	(0.0004)	(0.0006)	(0.0008)	(0.0009)
Financial Freedom	−0.0015***	−0.0012***	−0.0115***	−0.0155	−0.0010	−0.0027
	(0.0002)	(0.0003)	(0.0003)	(0.0001)	(0.0009)	(0.0009)
Investment Freedom	0.0005**	0.0002	0.0007	0.0009	0.0007	−0.0001
	(0.0003)	(0.0005)	(0.0004)	(0.0001)	(0.0001)	(0.0001)
Inflation Rate	0.0010***	0.0001	0.0001	0.0012	−0.0005	0.0004
	(0.0002)	(0.0004)	(0.0003)	(0.0014)	(0.0010)	(0.0009)
Economic cycle	0.0003***	−0.0002	−0.0001	0.0003	−0.0008	−0.0012**
	(0.0001)	(0.0018)	(0.0001)	(0.0006)	(0.0006)	(0.0005)
Constant	0.0050	0.0569***	0.0335***	0.0196	0.0257	0.00414
	(0.00668)	(0.0133)	(0.00847)	(0.0307)	(0.0226)	(0.0151)
Observations	14,369	14,369	14,369	2,224	2,224	2,224
Number of ids	899	899	899	139	139	139
AR (2(2) $$\text{X}{*}_{\text{it}}=\beta {\text{Z}}_{\text{it}-\text{1}}+V_{\text{t}}+u_{\text{i}}$$(2) )	0.156	0.521	506	0.137	0.755	0.934
Hansen Statistics	0.927	0.198	0.380	0.904	0.418	0.178

Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Author’s Calculations by using Stata.

Table 4. A two-step system GMM results: Dependent variables: total capital ratio (TCAPR), total risk-based capital ratio (TRBCR) and buffer capital ratio (BTRBCR).

	Adequately-capitalized Banks
	(1)	(2)	(3)
VARIABLES	TCAPR	TRBCR	BTRBCR
Lagged. Dependent	0.634***	0.765***	0.782***
	(0.132)	(0.0709)	(0.114)
Profitability	0.0804	0.379	−0.158
	(0.533)	(0.521)	(0.523)
Credit Risk	0.330*	0.812***	0.647***
	(0.181)	(0.150)	(0.168)
Liquidity	0.0074	0.0015	0.0022
	(0.0044)	(0.0031)	(0.0033)
Bank Efficiency	0.0004	0.0002	0.0001
	(0.0005)	(0.0003)	(0.0003)
Income Diversification	0.0051	−0.0015	0.0005
	(0.0048)	(0.0033)	(0.0041)
Market Power	−0.0038	0.0002	−0.0006
	(0.0046)	(0.0029)	(0.0025)
Assets Diversification	−0.0112	0.0045	0.0070
	(0.0088)	(0.0048)	(0.0052)
Industry Development	−0.0082	0.0036***	0.0026***
	(0.0012)	(0.0005)	(0.0004)
Bank Size	−0.0017*	−0.0015***	−0.0013**
	(0.0009)	(0.0006)	(0.0006)
Financial Freedom	−0.0004***	−0.0009	−0.0001
	(0.0001)	(0.0009)	(0.0001)
Investment Freedom	0.0002	0.0002	−0.0001
	(0.0001)	(0.0001)	(0.0001)
Inflation Rate	0.0005	−0.0023**	−0.0021*
	(0.0013)	(0.0011)	(0.0011)
Economic cycle	0.0007	0.0011**	0.0011*
	(0.0006)	(0.0005)	(0.0005)
Constant	0.0671**	0.0378	0.0404
	(0.0298)	(0.0237)	(0.0266)
Observations	1,649	1,649	1,649
Number of ids	104	104	104
AR (2)	0.724	0.699	0.703
Hansen Statistics	0.823	0.157	0.110

Standard errors in parentheses*** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Author’s Calculations by using Stata.

Table 5. A two-step system GMM results: Dependent variables: total capital ratio (TCAPR), total risk-based capital ratio (TRBCR) and buffer capital ratio (BTRBCR).

	Undercapitalized Banks			Significantly Undercapitalized Banks
	(1)	(2)	(3)	(4)	(5)	(6)
VARIABLES	TCAPR	TRBCR	BTRBCR	TCAPR	TRBCR	BTRBCR
Lagged. Dependent	0.822***	0.627***	0.653***	0.784***	0.767***	0.771***
	(0.119)	(0.0554)	(0.0678)	(0.0646)	(0.0492)	(0.0532)
Profitability	0.0649	−0.521*	−0.798**	0.0879	−0.344**	−0.811***
	(0.353)	(0.278)	(0.342)	(0.317)	(0.146)	(0.270)
Credit Risk	0.390***	0.740***	0.761***	−0.0487	0.526***	0.692***
	(0.0987)	(0.0753)	(0.0912)	(0.103)	(0.0553)	(0.0870)
Liquidity	0.0037*	−0.0035*	−0.0017	0.0065***	0.0009	−0.0022*
	(0.0019)	(0.0018)	(0.0021)	(0.0020)	(0.0009)	(0.0013)
Bank Efficiency	0.0008	−0.0002	0.0005	0.0002	−0.0001	−0.0003
	(0.0003)	(0.0002)	(0.0002)	(0.0003)	(0.0001)	(0.0002)
Income Diversification	0.0025	0.0073**	0.0113***	0.0087***	0.0034**	0.0088***
	(0.0046)	(0.0029)	(0.0040)	(0.0026)	(0.0014)	(0.0024)
Market Power	−0.0014**	−0.0013	−0.0023	0.0007	0.0002	0.0004
	(0.0006)	(0.0010)	(0.0023)	(0.0010)	(0.0003)	(0.0005)
Assets Diversification	−0.00269	0.00376	0.00433	−0.00750**	0.00212	0.00540
	(0.0046)	(0.0029)	(0.0035)	(0.0035)	(0.0022)	(0.0036)
Industry Development	−0.0243**	0.0029	0.0019	−0.0037	0.00059	−0.0021
	(0.0119)	(0.0059)	(0.0063)	(0.0049)	(0.0011)	(0.0021)
Bank Size	0.0007	−0.0006**	−0.0006	0.0021***	−0.0037	−0.0024
	(0.0006)	(0.0003)	(0.0004)	(0.0006)	(0.0001)	(0.0002)
Financial Freedom	−0.0001	−0.0006	−0.0004	−0.0003***	−0.0005*	−0.0001*
	(0.0001)	(0.0006)	(0.0009)	(0.0008)	(0.0003)	(0.0006)
Investment Freedom	0.0008	0.0001	−0.0008	0.0002**	0.0006	−0.0003
	(0.0001)	(0.0007)	(0.0009)	(0.0009)	(0.0004)	(0.0008)
Inflation Rate	0.0006	−0.0011*	−0.0018**	−0.0005	−0.0003	−0.0023***
	(0.0009)	(0.0006)	(0.0008)	(0.0007)	(0.0003)	(0.0006)
Economic cycle	0.0008	0.0007*	0.0008*	0.0013***	−0.0001	0.0003
	(0.0006)	(0.0004)	(0.0004)	(0.0004)	(0.0002)	(0.0004)
Constant	0.0014	0.0328**	0.0245	0.0063	0.0091	0.0198*
	(0.0153)	(0.0147)	(0.0155)	(0.0137)	(0.0104)	(0.0110)
Observations	3,950	3,950	3,950	6,848	6,848	6,848
Number of ids	247	247	247	409	409	409
AR (2)	0.240	0.809	0.945	0.215	0.877	0.991
Hansen Statistics	0.620	0.504	0.320	0.860	0.231	0.941

Standard errors in parentheses*** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Author’s Calculations by using Stata.

Table 6. A two-step system GMM results: Dependent variables: total capital ratio (TCAPR), total risk-based capital ratio (TRBCR) and buffer capital ratio (BTRBCR).

	High Liquid Banks			Low Liquid Banks
	(1)	(2)	(3)	(4)	(5)	(6)
VARIABLES	TCAPR	TRBCR	BTRBCR	TCAPR	TRBCR	BTRBCR
Lagged. Dependent	0.764***	0.635***	0.724***	0.830***	0.780***	0.743***
	(0.0786)	(0.0531)	(0.0487)	(0.0657)	(0.0550)	(0.0555)
Constant	0.0371**	0.0513***	0.0621***	−0.0005	0.0049	0.0127
	(0.0182)	(0.0185)	(0.0140)	(0.0123)	(0.0122)	(0.0115)
Observations	7,233	7,233	7,233	7,520	7,520	7,520
Number of id	453	453	453	446	446	446
AR (2)	0.170	0.833	0.418	0.134	0.394	0.483
Hansen Statistics	0.566	0.129	0.940	0.270	0.213	0.431

Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Author’s Calculations by using Stata.

Table 7. A two-step system GMM results: Dependent variables: total capital ratio (TCAPR), total risk-based capital ratio (TRBCR) and buffer capital ratio (BTRBCR).

	Post-Crisis Periods Results			Before-Crisis Period Results
Panel-A	(1)	(2)	(3)	(1)	(2)	(3)
VARIABLES	TCAPR	TRBCR	BTRBCR	TCAPR	TRBCR	BTRBCR
Lagged. Dependent	0.622***	0.611***	0.601***	0.483***	0.530***	0.629***
	(0.144)	(0.0503)	(0.0484)	(0.0702)	(0.0682)	(0.226)
Observations	7,384	7,384	7,384	3,692	3,692	3,692
Number of ids	899	899	899	899	899	899
AR (2)	0.662	0.471	0.350	0.236	0.472	0.694
Hansen Statistics	0.579	0.372	390	0.183	0.134	0.109
Panel-B				During-Crisis Period Results
Lagged. Dependent				0.658***	0.804***	0.703
				(0.0825)	(0.0681)	(0.3411)
Observations				1,847	1,847	1,847
Number of ids				899	899	899
No. of Instruments				17	17	17
AR (2)				0.123	0.234	0.341

Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Author’s Calculations by using Stata.

Table 8. A two-step system GMM results: Dependent variables: Tier one capital ratio (TITA), Tier I risk-based ratio (TIRBCR) and Tier-I buffer ratio (BTIRBCR).

	Overall Sample Banks			Effect of Sub-ordinated debts
Panel-A	(1)	(2)	(3)	(4)	(5)	(6)
VARIABLES	TITA	TIRBCR	BTIRBCR	TITA	TIRBCR	BTIRBCR
Lagged. Dependent	0.850***	0.795***	0.768***	0.819***	0.749***	0.742***
	(0.0318)	(0.0279)	(0.0350)	(0.0496)	(0.0310)	(0.222)
Observations	14,369	14,369	14,369	2,224	2,224	2,224
Number of id	899	899	899	139	139	139
AR (2)	0.910	0.342	0.397	0.650	0.512	0.709
Hansen value	0.061	0.123	0.330	0.189	0.174	0.508
Panel-B	Well-capitalized Banks			Adequately-capitalized Banks
Lagged. Dependent	0.759***	0.729***	0.642***	0.872***	0.855***	0.807***
	(0.0596)	(0.0610)	(0.122)	(0.130)	(0.101)	(0.118)
Observations	2,224	2,224	2,224	1,633	1,633	1,633
Number of id	139	139	139	103	103	103
AR (2)	0.750	0.912	0.709	0.556	0.330	0.311
Hansen value	0.289	0.074	0.608	0.916	0.318	0.332

Standard errors in parentheses *** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Author’s Calculations by using Stata.

Table 9. A two-step system GMM results: Dependent variables: Tier one capital ratio (TITA), Tier I risk-based ratio (TIRBCR) and Tier-I buffer ratio (BTIRBCR).

	Undercapitalized Banks			Significantly Undercapitalized Banks
Panel-A	(1)	(2)	(3)	(4)	(5)	(6)
VARIABLES	TITA	TIRBCR	BTIRBCR	TITA	TIRBCR	BTIRBCR
Lagged. Dependent	0.879***	0.807***	0.739***	0.823***	0.805***	0.805***
	(0.0473)	(0.0451)	(0.0519)	(0.0400)	(0.0412)	(0.0436)
Observations	3,855	3,855	3,855	6,576	6,576	6,576
Number of id	241	241	241	411	411	411
AR (2)	0.407	0.814	0.969	0.422	0.195	0.257
Hansen value	0.139	0.140	0.150	0.235	0.632	0.502
Panel-B	High Liquid Banks			Low Liquid Banks
Lagged. Dependent	0.815***	0.754***	0.757***	0.818***	0.789***	0.759***
	(0.0397)	(0.0365)	(0.0425)	(0.0411)	(0.0373)	(0.0498)
Observations	7,137	7,137	7,137	7,232	7,232	7,232
Number of id	447	447	447	452	452	452
AR (2)	0.670	0.631	0.995	0.248	0.212	0.310
Hansen value	0.341	0.245	0.430	0.190	0.065	0.132

Standard errors in parentheses*** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Author’s Calculations by using Stata.

Table 10. Names and Measurements of Variables.

Name of Variable	Measurement of Variables
Total Capital Ratio (TCAPR)	Total Equity to Total Assets (Lee & Hsieh, 2013)
Total Risk-Based Capital Ratio (TRBCR)	Tier I Plus Tier II to Risk-Weighted Assets (Guidara et al., 2013)
Capital Buffer Ratio (BTRBCR)	Actual Capital Ratio less 8% (Guidara et al., 2013), (Jokipii & Milne, 2011)
Tier I Capital ratio (TITA)	Tier I equity to Total Assets (Bitar et al., 2018)
Tier I Risk-based capital ratio (TIRBCR)	Tier I equity to Risk-Weighted Assets (Abbas et al., 2019a)
Tier I buffer ratio (BTIRBCR)	Tier I Capital ratio less 6% (Abbas et al., 2019a)
Profitability (ROA)	Net Income to Total Assets (Sufian & Habibullah, 2010)
Credit Risk (ALLGL)	Allowance for Loan Losses to Gross Loans (Lee & Hsieh, 2013)
Liquidity (LTOD)	Loans to Deposits
Bank Efficiency (BE)	Overhead to Revenue (Bitar et al., 2016)
Income Diversification (INDIV)	Non-interest income to gross revenue (Shim, 2013)
Market Power (MP)	Deposits to Industrial Assets (Bitar et al., 2016)
Assets Diversification (AD)	1 − ((CLOANi/, tEAi, t)2+ (BLOANi,/tEAi,t)2+ (SECi,/tEAi,t)2+ OTHERAi,/tEAi,t)2)
Industrial Development (INDD)	Total Assets of Bank to Total Industrial Assets
Bank Size	Natural Log of Total Assets (Lee & Hsieh, 2013)
Investment Freedom (INVFD)	Investment freedom is taken from the Heritage Foundation (2018) (Sufian & Habibullah, 2010)
Financial Freedom (FFD)	Financial freedom is taken from the Heritage Foundation (2018) (Sufian & Habibullah, 2010)
Inflation Rate	Annual change in Consumer Price Index (Lee & Hsieh, 2013)
Economic cycle (RGDPR)	Growth in the real gross domestic product (Lee & Hsieh, 2013)

Source: Author’s Calculations by using Stata.

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