How commercial banks adjust capital ratios: Empirical evidence from the USA?‎

Figures & data

Table

Name of Variable	Measurement of Variables
Leverage ratio	Total Equity to Total Assets (Lee & Hsieh, 2013; Abbas & Ali, 2020)
Tier-I leverage	Tier-I equity to total assets (Abbas, Butt et al., 2019)
Regulatory ratio	Tier I Plus Tier II to Risk-Weighted Assets (Guidara et al., 2013)
Capital Buffer Ratio	Actual Capital Ratio less than 8% (Guidara et al., 2013; Jokipii & Milne, 2011)
Tier-I regulatory ratio	Tier-I equity to Risk-weighted Assets (Bitar et al., 2018)
Common equity regulatory ratio	Common equity to Risk-weighted assets (Bitar et al., 2018)
Tier-buffer ratio	Actual Tier-I ratio less than 6% (Abbas, Butt et al., 2019; Bitar et al., 2018)
Common equity buffer ratio	Actual Common equity ratio less than 4.5% (Abbas, Butt et al., 2019)
Profitability	Net Income to Total Assets (Yousaf et al., 2019))
Liquidity	Liquid assets to total assets (Yousaf et al., 2018; Ali et al., 2020)
Loan growth	Loans to Total Assets (Abbas, Iqbal et al., 2019)
Bank size	Natural Log of Total Assets (Ali et al., 2019; Lee & Hsieh, 2013)
Economic growth	Real gross domestic product (Abbas & Masood, 2020b)
Inflation Rate	Annual change in Consumer Price Index (Lee & Hsieh, 2013)

Table 1. Descriptive statistics

Variable	Obs	Mean	Std.Dev.	Min	Max
Leverage ratio	17010	.112	.018	.065	.173
Regulatory ratio	17010	.131	.027	.024	.275
Tier-I leverage	17010	.094	.015	.050	.151
Tier-I regulatory ratio	17010	.128	.020	.080	.207
Common equity regulatory ratio	17010	.126	.021	.047	.201
Capital buffer ratio	17010	.089	.031	−.026	.151
Tier-I buffer ratio	17010	.067	.020	−.008	.146
Common equity buffer ratio	17010	.082	.025	−.017	.165
Profitability	17010	.009	.005	−.051	.027
Liquidity	17010	.048	.027	−.054	.156
Loans growth	17010	.714	.148	.044	1.185
Bank size	17010	13.58	.95	12.259	15.538
Economic growth	17010	.020	.014	−.025	.038
Inflation rate	17010	1.934	.649	.759	3.218

(Source authors calculation by using Stata)

Table 2. Pairwise correlations matrix

Vari ables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)
Leverage ratio	1.000
Regula tory ratio	0.496*	1.000
Tier-I leverage	0.766*	0.639*	1.000
Tier-I regulatory	0.528*	0.912*	0.683*	1.000
Com. equity regulatory	0.499*	0.900*	0.631*	0.939*	1.000
Capital buffer ratio	0.481*	0.983*	0.630*	0.934*	0.917*	1.000
Tier-I buffer ratio	0.474*	0.957*	0.630*	0.947*	0.924*	0.982*	1.000
Common equity buffer	0.504*	0.922*	0.631*	0.926*	0.984*	0.922*	0.923*	1.000
Profit ability	0.062*	0.069*	0.081*	0.044*	0.083*	0.062*	0.054*	0.087*	1.000
Liquidity	0.036*	0.181*	0.113*	0.193*	0.184*	0.184*	0.177*	0.181*	−0.074*	1.000
Loan growth	−0.084*	−0.447*	−0.055*	−0.470*	−0.458*	−0.443*	−0.435*	−0.459*	0.034*	−0.151*	1.000
Bank size	0.134*	−0.101*	−0.081*	−0.137*	−0.158*	−0.099*	−0.117*	−0.155*	−0.040*	−0.064*	−0.038*	1.000
Economic growth	0.018*	0.035*	0.057*	0.048*	0.036*	0.035*	0.046*	0.036*	0.166*	−0.061*	0.005	−0.024*	1.000
Inflation rate	−0.097*	−0.105*	−0.088*	−0.102*	−0.109*	−0.113*	−0.107*	−0.105*	0.132*	−0.193*	0.083*	−0.127*	0.546*	1.000

* shows significance at the.05 level

Table 3. Findings for the full sample of commercial banks. Dependent variable ratios: Leverage ratio, tier-I leverage ratio, regulatory ratio, tier-I regulatory ratio, common equity regulatory ratio

	(1)	(2)	(3)	(4)	(5)
VARIABLES	Leverage ratio	Tier-I leverage	Regulatory ratio	Tier-I Regulatory ratio	Common equity regulatory ratio
Lagged Dependent	0.815***	0.846***	0.774***	0.828***	0.801***
	(0.025)	(0.029)	(0.037)	(0.028)	(0.027)
Profitability	−0.239***	−0.357***	−0.357***	−0.292***	−0.145***
	(0.048)	(0.056)	(0.078)	(0.050)	(0.052)
Liquidity	−0.014***	−0.017***	0.050***	0.039***	0.045***
	(0.004)	(0.004)	(0.006)	(0.004)	(0.004)
Loans growth	−0.008***	−0.012***	−0.031***	−0.021***	−0.022***
	(0.001)	(0.001)	(0.002)	(0.002)	(0.002)
Bank size	0.001***	−0.000***	−0.001***	−0.001***	−0.001***
	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Economic growth	0.013*	0.042***	−0.005	0.001	−0.026***
	(0.008)	(0.008)	(0.014)	(0.010)	(0.010)
Inflation rate	0.000**	−0.001***	−0.001***	−0.000**	−0.000
	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Constant	0.019***	0.035***	0.070***	0.047***	0.050***
	(0.003)	(0.004)	(0.009)	(0.006)	(0.006)
Observations	16,065	16,065	16,065	16,065	16,065
Number of id	945	945	945	945	945
No. of Instrument	9	9	9	9	9
AR (2)	0.261	0.226	0.572	0.417	0.458
Hansen value	0.429	0.087	0.146	0.082	0.524

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

Table 4. Findings for Before-crisis, During-crisis, and Post-crisis periods of commercial banks. Dependent variable ratios: Leverage ratio, tier-I leverage ratio, regulatory ratio, tier-I regulatory ratio, common equity regulatory ratio

	(1)	(2)	(3)	(4)	(5)
VARIABLES	Leverage ratio	Tier-I leverage	Regulatory ratio	Tier-I Regulatory ratio	Common equity regulatory ratio
Panel-A: Post-crisis results
Lagged Dependent	0.605***	0.746***	0.580***	0.648***	0.555***
	(0.033)	(0.029)	(0.041)	(0.037)	(0.047)
Panel-B: During-crisis results
Lagged Dependent	0.641***	0.666***	0.866***	0.784***	0.793***
	(0.078)	(0.309)	(0.309)	(0.037)	(0.357)
Panel-C: Before-crisis results
Lagged Dependent	0.434***	0.546***	0.441***	0.548***	0.731***
	(0.108)	(0.029)	(0.105)	(0.037)	(0.064)
Constant	0.019***	0.035***	0.070***	0.047***	0.050***
	(0.003)	(0.004)	(0.009)	(0.006)	(0.006)
Observations	16,065	16,065	16,065	16,065	16,065
Number of id	945	945	945	945	945
No. of Instrument	9	9	9	9	9
AR (2)	0.155	0.108	0.168	0.917	0.487
Hansen value	0.095	0.059	0.156	0.387	0.295

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

Table 5. Findings of Sub-categories based on the capitalization large of commercial banks. Dependent variable ratios: Leverage ratio, tier-I leverage ratio, regulatory ratio, tier-I regulatory ratio, common equity regulatory ratio

	(1)	(2)		(3)	(4)	(5)
VARI ABLES	Leverage ratio	Tier-I leverage		Regulatory ratio	Tier-I Regulatory ratio	Common equity regulatory ratio
Panel-A: Well Capitalized Banks
Lagged Dependent	0.723***	0.807***		0.684***	0.789***	0.647***
	(0.068)	(0.079)		(0.105)	(0.077)	(0.113)
Panel-B: Adequately Capitalized Banks
Lagged Dependent	0.892***	0.845***	0.802***		0.898***	0.809***
	(0.115)	(0.105)	(0.089)		(0.080)	(0.071)
Panel-C: Under Capitalized Banks
Lagged Dependent	0.815***	0.821***		0.762***	0.780***	0.764***
	(0.040)	(0.047)		(0.044)	(0.040)	(0.040)
Profitability	−0.059	−0.156		0.068	−0.030	0.315*
	(0.128)	(0.107)		(0.238)	(0.093)	(0.178)
Liquidity	−0.011	−0.015**		0.009	0.012	0.011
	(0.010)	(0.007)		(0.020)	(0.008)	(0.011)
Loan growth	−0.005**	−0.008***		−0.023***	−0.012***	−0.013***
	(0.002)	(0.002)		(0.004)	(0.002)	(0.003)
Bank size	0.001	0.000		0.000	−0.000	−0.000
	(0.000)	(0.000)		(0.001)	(0.000)	(0.000)
Economic growth	0.019	0.049**		−0.059	−0.030	−0.037
	(0.021)	(0.020)		(0.037)	(0.020)	(0.023)
Inflation rate	0.000	−0.001		0.000	−0.000	−0.001*
	(0.000)	(0.000)		(0.001)	(0.000)	(0.001)
Constant	0.029***	0.028***		0.063***	0.041***	0.063***
	(0.009)	(0.009)		(0.022)	(0.014)	(0.020)
Observations	2,482	2,482		2,482	2,482	2,482
Number of id	146	146		146	146	146
No. of Inst.	9	9		9	9	9
AR (2)	0.717	0.572		0.726	0.936	0.999
Hansen value	0.789	0.332		0.579	0.984	0.440

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

Table 6. Findings of sub-categories based on the liquidity of large commercial banks. Dependent variable ratios: Leverage ratio, tier-I leverage ratio, regulatory ratio, tier-I regulatory ratio, common equity regulatory ratio

	(1)	(2)	(3)	(4)	(5)
VARIABLES	Leverage ratio	Tier-I leverage	Regulatory ratio	Tier-I Regulatory ratio	Common equity regulatory ratio
Panel-A: High Liquid Banks
Lagged Dependent	0.801***	0.831***	0.749***	0.793***	0.769***
	(0.036)	(0.043)	(0.044)	(0.034)	(0.039)
Panel-B: Low Liquid Banks
Lagged Dependent	0.825***	0.852***	0.795***	0.848***	0.830***
	(0.035)	(0.039)	(0.059)	(0.041)	(0.036)
Profitability	−0.201***	−0.409***	−0.412***	−0.289***	−0.050
	(0.066)	(0.085)	(0.112)	(0.071)	(0.077)
Liquidity	−0.017***	−0.024***	0.025***	0.023***	0.033***
	(0.005)	(0.005)	(0.008)	(0.006)	(0.006)
Loans growth	−0.009***	−0.015***	−0.039***	−0.027***	−0.027***
	(0.001)	(0.001)	(0.003)	(0.002)	(0.002)
Bank size	0.000	−0.001***	−0.002***	−0.001***	−0.001***
	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Economic growth	0.003	0.043***	0.002	0.007	−0.037**
	(0.010)	(0.010)	(0.018)	(0.013)	(0.014)
Inflation rate	0.000**	−0.001***	−0.001***	−0.001***	−0.001**
	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Constant	0.028***	0.042***	0.094***	0.065***	0.069***
	(0.006)	(0.007)	(0.013)	(0.009)	(0.010)
Observations	7,973	7,973	7,973	7,973	7,973
Number of id	469	469	469	469	469
No. of Inst.	9	9	9	9	9
AR (2)	0.604	0.572	0.974	0.916	0.969
Hansen value	0.290	0.106	0.712	0.328	0.058

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

Table 7. Findings of large commercial banks for capital buffer ratios.—dependent variables capital buffer ratio, tier-I buffer ratio, common equity buffer ratio

	(1)	(2)	(3)	(1)	(2)	(3)
VARIABLES	Capital buffer	Tier-I buffer	Common equity buffer	Capital buffer	Tier-I buffer	Common equity buffer
Full Sample Results				Well Capitalized Banks Results
Lagged Dependent	0.791***	0.802***	0.797***	0.659***	0.701***	0.773***
	(0.028)	(0.028)	(0.026)	(0.099)	(0.106)	(0.081)
Profitability	−0.314***	−0.303***	−0.178***	0.004	0.013	0.380*
	(0.064)	(0.057)	(0.068)	(0.167)	(0.138)	(0.214)
Liquidity	0.042***	0.037***	0.053***	0.003	0.002	0.025*
	(0.005)	(0.004)	(0.005)	(0.015)	(0.012)	(0.014)
Loan growth	−0.024***	−0.021***	−0.026***	−0.014***	−0.010***	−0.016***
	(0.002)	(0.001)	(0.002)	(0.003)	(0.002)	(0.003)
Bank size	−0.001***	−0.001***	−0.001***	0.000	0.000	−0.000
	(0.000)	(0.000)	(0.000)	(0.001)	(0.001)	(0.001)
Economic growth	−0.007	0.004	−0.028**	−0.061**	−0.051**	−0.031
	(0.011)	(0.010)	(0.011)	(0.027)	(0.024)	(0.030)
Inflation rate	−0.001***	−0.000***	−0.000	0.000	0.000	−0.002**
	(0.000)	(0.000)	(0.000)	(0.001)	(0.001)	(0.001)
Constant	0.042***	0.038***	0.047***	0.032***	0.028**	0.039***
	(0.004)	(0.004)	(0.005)	(0.012)	(0.012)	(0.013)
Observations	16,065	16,065	16,065	2,482	2,482	2,482
Number of id	945	945	945	146	146	146
No. of Ins.	9	9	9	9	9	9
AR (2)	0.448	0.359	0.646	0.868	0.479	0.334
Hansen value	0.245	0.060	0.236	0.407	0.352	0.570

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

Table 8. Findings of large commercial banks for capital buffer ratios. Dependent variables capital buffer ratio, tier-I buffer ratio, common equity buffer ratio

	(1)	(2)	(3)	(1)	(2)	(3)
VARIABLES	Capital buffer	Tier-I buffer	Common equity buffer	Capital buffer	Tier-I buffer	Common equity buffer
	Panel -A: Adequately Capitalized banks			Under Capita lized banks
Lagged Dependent	0.838***	0.860***	0.798***	0.757***	0.754***	0.764***
	(0.078)	(0.076)	(0.068)	(0.036)	(0.037)	(0.038)
	Panel -B: High Liquid Banks			Low Liquid Banks
Lagged Dependent	0.770***	0.774***	0.779***	0.806***	0.822***	0.817***
	(0.033)	(0.034)	(0.037)	(0.045)	(0.043)	(0.035)
Profitability	0.026	0.073	−0.014	−0.322***	−0.336***	−0.154
	(0.178)	(0.153)	(0.184)	(0.112)	(0.102)	(0.126)
Liquidity	0.028**	0.023*	0.037**	0.050***	0.046***	0.063***
	(0.014)	(0.012)	(0.014)	(0.010)	(0.009)	(0.010)
Loan growth	−0.022***	−0.018***	−0.027***	−0.035***	−0.031***	−0.034***
	(0.004)	(0.004)	(0.004)	(0.003)	(0.002)	(0.003)
Bank size	−0.001***	−0.001***	−0.001**	−0.001**	−0.001**	−0.001**
	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Economic growth	0.016	0.005	−0.014	0.017	0.028	−0.018
	(0.032)	(0.031)	(0.037)	(0.022)	(0.021)	(0.023)
Inflation rate	−0.002***	−0.002***	−0.001**	−0.001***	−0.001***	−0.000
	(0.001)	(0.001)	(0.001)	(0.000)	(0.000)	(0.000)
Constant	0.045***	0.038***	0.053***	0.052***	0.051***	0.053***
	(0.010)	(0.010)	(0.012)	(0.006)	(0.006)	(0.007)
Observations	1,819	1,819	1,819	4,265	4,265	4,265
Number of id	107	107	107	251	251	251
No. of inst.	9	9	9	9	9	9
AR (2)	0.254	0.154	0.839	0.850	0.969	0.848
Hansen value	0.507	0.302	0.487	0.934	0.477	0.295

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

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