Bank Differences in the Coordination of Regulatory Capital, Earnings, and Taxes

TLDR

Regulatory capital‑raising decisions are expected to be coordinated with financial reporting and tax incentives. The study investigates bank‑specific regulatory capital‑raising decisions and captures differences in banks’ priorities and strategies. The authors estimate bank‑specific regressions from 1971–1991 to assess how changes in capital, earnings, and taxes relative to within‑bank means influence seven capital‑raising options.

Abstract

This study investigates bank-specific regulatory capital-raising decisions. Such decisions are expected to be coordinated with financial reporting and/or tax incentives. We examine the impact of individual banks' changing levels of capital, earnings, and taxes on decisions to engage in seven capital-raising options: security gains and losses, loan loss provisions, loan charge-offs, capital notes, common stock, preferred stock, and dividends. Unlike related studies, we measure capital, earnings, and tax pressures relative to within-bank means, rather than relative to annual or pooled cross-sectional means, by estimating bank-specific regressions for each of the capital-raising options from 1971 to 1991. Thus, we capture differences in banks' priorities and strategies for