Capital Management of Deposit Takers: The Impact of Prudential Requirements
QThis paper explores how the proximity of an instituions's capital-adequacy ratio to the regulatory minimum influences the capital-adequacy ratio observed in the following period. It is shown that banks and credit unions react differently to the prudential constraints. The majority of banks tend to operate with a small buffer of capital above the regulatory minimum; if their capital -adequacy ratio gets too close to the minimum then the bank tends to increase the ratio ove the next year, while if the bank finds itself with a ratio well above the minimum then it is inclined to decrease the ratio. In constrast, the capital-adequacy ratio for many credit unions evolves like a random walk.
Capital Ratio; Solvency; Prudential Supervision; Bank
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