| By: |
John P. Harding (University of Connecticut);
Xiaozhong Liang (State Street Corporation);
Stephen L. Ross (University of Connecticut) |
| Abstract: |
This paper studies the impact of capital requirements, deposit insurance and
tax benefits on a bank's capital structure. We find that properly regulated
banks voluntarily choose to maintain capital in excess of the minimum
required. Central to this decision is both tax advantaged debt (a source of
firm franchise value) and the ability of regulators to place banks in
receivership stripping equity holders of firm value. These features of our
model help explain both the capital structure of the large mortgage Government
Sponsored Enterprises and the recent increase in risk taking through leverage
by financial institutions. |
| Keywords: |
Banks, Capital Structure, Capital Regulation, Financial Intermediation, Leverage, GSE, Investment Banks |
| JEL: |
G21 G28 G32 G38 |
| Date: |
2009–02 |
| URL: |
http://d.repec.org/n?u=RePEc:uct:uconnp:2009-09&r=cfn |