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Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments
Author(s) -
LAM CHUN H.,
CHEN ANDREW H.
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb04973.x
Subject(s) - deregulation , capital requirement , interest rate , portfolio , cost of capital , business , capital adequacy ratio , monetary economics , economics , cash flow , capital (architecture) , finance , financial system , microeconomics , macroeconomics , profit (economics) , history , archaeology , incentive
The 1980 Depository Institution Deregulation and Monetary Control Act (DIDMCA) mandates that Regulation Q be phased out by 1986. With deregulation of interest rate ceilings, the cost of raising capital funds for commercial banks would become more volatile and more closely related with interest rates in the money and capital markets. Thus, value‐maximizing bank managers would need to be concerned not only with the internal risk, but also with the external risk in bank portfolio management decisions. Based upon the cash flow version of the capital asset pricing model, this paper analyzes the joint impact of interest rate deregulation and capital requirements on the portfolio behavior of a banking firm.