Can We Explain Banks' Capital Structures?

www.philadelphiafed.org While this view appears plausible, it actually contradicts the evidence of the last 20 years, which shows that banks do not appear to hold the minimum amount of equity required by regulators. Furthermore, while banks are typically highly leveraged compared with most nonfinancial firms, this doesn’t mean that similar forces are not at work when banks and nonfinancial firms choose their capital levels. To the contrary, empirical work by banking scholars supports the view that market forces have been an important determinant of banks’ capital decisions since the early 1990s. Bank capital has been much in the news during the recent financial crisis. In 2008 and 2009 the U.S. government injected $235 billion of capital into the banking system as part of the Troubled Asset Relief Program (TARP).2 And in 2009, bank regulators performed a full-scale evaluation of the capital adequacy of 19 large banking organizations, ultimately requiring 10 of these organizations to increase their capital levels.3 While most commentators agree that regulatory capital levels are too low for large organizations — especially large organizations that create systemic risks — financial economists