On Regulation, Supervision, (De)Leveraging and Banking Competition : Harder, Better, Faster, Stronger?

This paper examines international differences in banks' capital structure adjustments across a large panel of 94 countries over the period 1993 to 2007. A bank's ability to adjust its capital ratio is influenced by corporate governance, public policy, market structure, and bank regulatory characteristics of the countries. In institutional environments with higher adjustment costs, due to the weaker governance and stricter regulation, the adjustment is significantly slower. Banks are able to make faster capital structure adjustments in countries that practice stronger private and supervisory monitoring and have more competitive banking systems. Identifying the drivers of banks' adjustment speed towards target capital ratios contributes to our understanding of which settings influence (i) the pro-cyclicality of capital regulation and (ii) the strength of macro-financial feedback loops