Skip to main content

Optimal Financial Structure and Bank Capital Requirements: An Empirical Investigation


This paper presents an empirical analysis of the determinants of the leverage ratios (the book value of liabilities divided by the total of the book value of liabilities' and the market value of equity) for 232 bank holding companies for December 1986, June 1987, and December 1987. Many theoretical models of bank behavior assume that bank capital requirements will be binding, and empirical research has generally shown that almost all- banks will meet capital guidelines. However, if the optimal leverage ratios differ among banks, then banks' responses to changes in capital requirements or to changes in factors that influence their optimal leverage ratio may vary in a cross section. The theoretical framework is a variant of the one developed in Bradley, Jarrell, and Kim (1984). The optimal leverage ratio balances the tax advantage of debt with the costs of bankruptcy. In addition to considering nondebt tax shields and tax rates as determinants of the optimal ratio, we analyze the simultaneity between leverage and investment in municipal securities (munis). Previous research indicates that banks utilize munis to' minimize tax liabilities.


Suggested citation: Osterberg, William, and James Thomson, 1990. “Optimal Financial Structure and Bank Capital Requirements: An Empirical Investigation,” Federal Reserve Bank of Cleveland, Working Paper no. 90-07.

Upcoming EventsSEE ALL

  • 06.23.21

    Policy Summit 2021: Pathways to Economic Resilience in Our Communities

    Offering the latest research on and best practices for promoting the economic mobility and resilience of low- and moderate-income individuals, families, and communities.

  • 07.12.21

    Summer Research Coding Camp

    Summer Research Coding Camp is a virtual week-long immersive program for rising high school juniors and seniors. Students will participate in experiential hands-on activities exposing them to real world skills such as data analysis and interpretation while exploring how economists utilize these skills in their careers.

  • 10.07.21

    Inflation: Drivers and Dynamics Conference 2021

    The European Central Bank (ECB) and the Federal Reserve Bank of Cleveland’s Center for Inflation Research will host the Inflation: Drivers and Dynamics Conference 2021, which will be held virtually on October 7–8.

  • 11.17.21

    2021 Financial Stability Conference: Planning for Surprises, Learning from Crises

    The Federal Reserve Bank of Cleveland and the Office of Financial Research will host their annual financial stability conference, Financial Stability: Planning for Surprises, Learning from Crises, which will be held virtually on November 17-19, 2021.