Large banking organizations in the U.S. hold
significantly more equity capital than the minimum
required by bank regulators. This capital cushion has
built up during a period of unusual profitability for
the banking system, leading some observers to argue that
the capital merely reflects recent profits. Others
contend that the banks deliberately choose target
capital levels based on their risk exposures and their
counterparties’ sensitivities to default risk. In either
case, the existence of “excess” capital makes it
difficult to observe how banks manage their capital
levels, particularly in response to regulatory changes
(such as Basel II). We propose several hypotheses to
explain this “excess” capital, and test these hypotheses
using annual panel data for large, publicly traded U.S.
bank holding companies. Abstract, full text available
for download. 2008
