OPTIMAL FINANCIAL STRUCTURE AND BANK CAPITAL REQUIREMENTS - AN EMPIRICAL-INVESTIGATION

We analyze the empirical impact of regulatory capital standards on lev erage ratios of 232 bank holding companies for December 1986, June 198 7, and December 1987. Since the interaction of market and regulatory f orces determines the optimal leverage ratios of banks, even if almost all banks meet the capital standards, capital regulation will influenc e movements of leverage in a cross-section. We find that leverage is i nfluenced by both capital standards and market forces and that there i s simultaneity between leverage and municipal securites, the latter be ing used to minimize tax liabilities.