How sensitive are bank market values to regulatory adjustments of capital?

Abstract

We measure the sensitivity of bank market values to capital and to regulatory adjustments applied to bank capital. Results for U.S. banks over the years 2001-2020 show that the sensitivity of banks’ market values to measures of bank capital e.g. book equity, Tier 1, and Total Capital, converges to a one-to-one relationship when market uncertainty is low and when banks’ Tier 1 ratios reach 12 percent of RWAs. Market values are more sensitive to changes in capital of highly geared banks when market uncertainty is high; with shareholders responding positively in particular to increases in Tier 1 and Total Capital. Share prices are less sensitive to deductions from capital. The methods we adopt thus show, with some precision, which adjustments proposed by regulators have positive and which adjustments have negative effects on market valuations of banks..

Martien Lubberink

Associate professor in Accounting and Capital

Associate Professor Martien Lubberink completed his PhD in Economics at Groningen University. His main research interests are accounting, banking, and capital.