Abstract: A Portfolio Model for Identifying Banks Operating under Capital Constraints

Extract

The paper presents evidence suggesting that banks with very low and very high capital positions respond to interest rate changes differently from other banks. The concept of a capital constraint is introduced to explain this phenomenon. The hypothesis is that banks with a binding capital constraint should exhibit different asset management decisions from those banks which are unconstrained. The regression results indicate that low-capital banks for the years 1973-74 and 1974-75 did not respond to earnings in an economic fashion.