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US banks' capitalization speed‐of‐adjustment: a microeconometric approach

Konstantinos Drakos (Department of Accounting and Finance, Athens University of Economics and Business, Athens, Greece)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 27 July 2012

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Abstract

Purpose

The purpose of this paper is to investigate whether there are any differences in the capitalization speed‐of‐adjustment across regulatory capitalization buckets of commercial banks in the USA, for the period 2002‐2009.

Design/methodology/approach

The Federal Deposit Insurance Corporation (FDIC) monitors banks' capital ratio using the bucketing approach. Thus, this discrete and ordered variable is modeled in the context of a partial adjustment specification, controlling for initial conditions and cross‐sectional heterogeneity. Parameters are estimated with the generalized dynamic random effects ordered probit technique that is flexible enough to allow for differential effects of covariates across capitalization categories.

Findings

The main result is that the speed of adjustment is monotonically increasing for banks belonging in lower capitalization buckets, after controlling for bank‐specific capitalization determinants. In addition, substantial differential impacts of capitalization drivers across regulatory buckets are uncovered.

Practical implications

This an important finding both for regulators and market participants since it sheds light on a very crucial aspect of banks' behaviour.

Originality/value

This is the first paper that adopts the FDIC bucketing in the actual modelling. In addition, it uses the generalized dynamic random effects ordered probit technique in order to explore potential differential impact of capital ratio determinants across buckets.

Keywords

Citation

Drakos, K. (2012), "US banks' capitalization speed‐of‐adjustment: a microeconometric approach", Journal of Financial Economic Policy, Vol. 4 No. 3, pp. 270-286. https://doi.org/10.1108/17576381211245980

Publisher

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Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited

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