Capital ratios and bank portfolio allocation: revisiting the 1990s "Credit Crunch" with a Bayesian discrete choice approach
The study explores the link between capital ratios and bank portfolio choices during financial strain using a unique approach. By treating portfolio adjustments as discrete decisions and comparing expected correlations to Bayesian model estimates, it identifies primary factors guiding banks' responses. Analyzing US commercial banks during the 1990s Credit Crunch, it suggests that while Basel Accord's risk-based capital requirements weren't the primary driver, banks likely responded to capital shocks, navigating constraints from leverage ratio requirements, and reacting to economic conditions.