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Title:Why do banks hold capital in excess of regulatory requirements? : A functional approach PDF Logo
Authors:Dietrich, Diemo
Vollmer, Uwe
Issue Date:2004
Series/Report no.:Diskussionspapiere / Institut fuer Wirtschaftsforschung Halle 192
Abstract:This paper provides an explanation for the observation that banks hold on average a capital ratio in excess of regulatory requirements. We use a functional approach to banking based on Diamond and Rajan (2001) to demonstrate that banks can use capital ratios as a strategic tool for renegotiating loans with borrowers. As capital ratios affect the ability of banks to collect loans in a nonmonotonic way, a bank may be forced to exceed capital requirements. Moreover, high capital ratios may also constrain the amount a banker can borrow from investors. Consequently, the size of the banking sector may shrink
Subjects:incomplete contracts
minimum capital requirements
bank capital
disintermediation
pro-cyclicality
JEL:G21
G28
Persistent Identifier of the first edition:urn:nbn:de:gbv:3:2-1555
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des IWH
IWH-Diskussionspapiere, Institut für Wirtschaftsforschung Halle (IWH)

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