Capital adequacy and the valuation of large commercial banking organizations

Bankers argue that regulatory agencies require excessive capital adequacy. As a consequence, banks cannot achieve optimal capital structure. This study investigates the capital adequacy issue for bank holding companies over the 1974–1983 period, one of the most turbulent periods in recent banking history. During this time, capital is never excessive from the stockholders' viewpoint, and financial markets, on average, perceive capital levels as inadequate. Assuming the public wants no lower capital levels than shareholders, recent regulatory action to require higher capital ratios is a Pareto superior decision.