The impact of regulation on bank capital augmentations in Spain
The increasing importance of bank prudential regulation in an era of financial liberalization and intense competition, together with the lack of empirical research on capital adequacy in the Spanish banking system, shape the motivation for this study. This research examines the impact of the Spanish bank capital adequacy regulation on capital augmentations (changes in the total amount of the capital) of banking institutions operating in Spain. The period analyzed is 1987-90, during which deregulation and the 1985 risk-based capital requirements have been two major forces in the Spanish banking markets. An empirical model of capital augmentations is developed for Spanish banks. The general model (employing regulatory and book-value capital) for both private and savings banks appears to explain better the capital augmentations of savings banks compared with those of private banks. One of the main findings in this general model is that capital adequacy regulation appears to be a stricter constraint for savings banks. Market-value capital is also employed in the model for the Spanish private banks quoted on the Spanish stock market, but the explanatory power of the model is not improved. When bank size is introduced into the analysis, the results appear to indicate that larger banks might have certain advantages in terms of capital ratios and in terms of capital augmentations. The findings of this research have implications for the role of the market in regulating capital adequacy, for the deregulation - reregulation framework of banking, the economic desirability of 'functional' (versus institutional) supervisory regulation of banks, and for the competitive neutrality of bank legislation.