Journal of Financial Services Research

, Volume 20, Issue 1, pp 33–56

Bank Portfolio Allocation: The Impact of Capital Requirements, Regulatory Monitoring, and Economic Conditions

  • Craig Furfine
Article

DOI: 10.1023/A:1011147609099

Cite this article as:
Furfine, C. Journal of Financial Services Research (2001) 20: 33. doi:10.1023/A:1011147609099

Abstract

This paper develops a structural, dynamic model of a banking firm to analyze how banks adjust their loan portfolios over time. In the model, banks experience capital shocks, face uncertain future loan demand, and incur costs based on their proximity to regulatory minimum capital requirements and the intensity of regulatory monitoring. Implications of the model then are estimated using panel data on large U.S. commercial banks operating continuously between December 1989 and December 1997. The estimated model is used to simulate the optimal bank response to (1) past and proposed changes in capital requirements, (2) changes in regulatory monitoring intensity, and (3) economic downturns. The simulation results are used to shed light on the decline in loan growth and the rise in bank capital ratios witnessed over a decade ago as well as the possible impact of the current proposed modification to capital requirements.

Credit crunch capital requirements bank portfolio allocation Basel Accord 

Copyright information

© Kluwer Academic Publishers 2001

Authors and Affiliations

  • Craig Furfine

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