BANK-HOLDING COMPANY CAPITAL TARGETS IN THE EARLY 1990S - THE REGULATORS VERSUS THE MARKETS

Several studies suggest that the credit crunch was due in large part to banks' needs to raise their capital ratios. The changes in bank capital ratios may have been in response to financial market or regulatory standards. This study develops a model to test the relative impact of the regulators and the financial markets on bank holding companies' (BHCs) capital ratios. The results suggest that most BHCs were relatively satisfied with their capital ratios in 1989. However, the regulators appear to have placed increased pressure on banks in 1990, 1991 and 1992, especially BHCs that were subject to regulatory orders.