Nonconsolidated Affiliates, Bank Capitalization, and Risk Taking

Research output: Working paperDiscussion paperOther research output

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Abstract

This paper is the first to show that financial institutions may be effectively undercapitalized as a result of incomplete consolidation of minority ownership. Using two approaches – consolidating the minority-owned affiliates with the parent or deducting equity investments in minority ownership from the parent’s capital – we find that the effective capitalization ratios of small US bank holding companies (BHCs) are substantially lower than the reported ratios. Empirical evidence suggests that the effectively lower capitalization ratios are associated with higher riskiness at the BHC level. Capital adjustments following pro forma consolidation better capture the additional risks than capital adjustments in the form of equity deductions for investments in minority-owned affiliates. These findings have important implications for the regulation of bank capital.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages54
Volume2017-003
Publication statusPublished - 19 Jan 2017

Publication series

NameCentER Discussion Paper
No.2017-003

Fingerprint

Capitalization
Minorities
Risk taking
Equity
Ownership
Bank holding companies
Consolidation
Risk capital
Deduction
Empirical evidence
Bank capital
Riskiness
Financial institutions

Keywords

  • capital regulation
  • organizational structure
  • undercapitalization
  • bank leverage
  • risk taking

Cite this

Gong, D., Huizinga, H., & Laeven, L. A. H. (2017). Nonconsolidated Affiliates, Bank Capitalization, and Risk Taking. (CentER Discussion Paper; No. 2017-003). Tilburg: CentER, Center for Economic Research.
Gong, Di ; Huizinga, Harry ; Laeven, L.A.H. / Nonconsolidated Affiliates, Bank Capitalization, and Risk Taking. Tilburg : CentER, Center for Economic Research, 2017. (CentER Discussion Paper; 2017-003).
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Gong, D, Huizinga, H & Laeven, LAH 2017 'Nonconsolidated Affiliates, Bank Capitalization, and Risk Taking' CentER Discussion Paper, no. 2017-003, CentER, Center for Economic Research, Tilburg.

Nonconsolidated Affiliates, Bank Capitalization, and Risk Taking. / Gong, Di; Huizinga, Harry; Laeven, L.A.H.

Tilburg : CentER, Center for Economic Research, 2017. (CentER Discussion Paper; No. 2017-003).

Research output: Working paperDiscussion paperOther research output

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Gong D, Huizinga H, Laeven LAH. Nonconsolidated Affiliates, Bank Capitalization, and Risk Taking. Tilburg: CentER, Center for Economic Research. 2017 Jan 19. (CentER Discussion Paper; 2017-003).