Bank Capitalization and Cost
Evidence of Scale Economies in Risk Management and Signaling
Bibliographic Data
| ID | 19316164 |
|---|---|
| Authors | Joseph P Hughes (0000-0001-5034-0562, Rutgers, the State University of New Jersey), Loretta J Mester (Federal Reserve Bank of Philadelphia) |
| Year | 1998 |
| Volume | 80 |
| Issue | 2 |
| Pages | 314-325 |
| Publication date | 1998-05-01 |
| Peer Reviewed | Yes |
| Open Access | No |
| Type | ARTICLE |
| Venue | The Review of Economics and Statistics (JOURNAL) |
| Journal identifiers | ISSN: 0034-6535 • E-ISSN: 1530-9142 |
| Publisher | MIT Press - Journals (PUBLISHER) |
| DOI | 10.1162/003465398557401 |
| OpenAlex | W2011800260 |
| Language | EN |
| Citations received | 4 |
| References cited | 13 |
We amend the standard cost model to account for the role of financial capital in banking. The cost function is conditioned on the level of capital, but we model the demand for financial capital so that it can serve as a cushion against insolvency for potentially risk-averse managers and as a signal of risk for less informed outsiders. Scale economies are then computed without assuming that the bank chooses a level of capitalization that minimizes cost. We find evidence of substantial scale economies and that bank managers are risk averse and use the level of financial capital to signal the level of risk
Business · Capital (architecture) · Capital cost · Capital requirement · Capitalization · Cost of capital · Economic capital · Economics · Economies of scale · Function (biology) · Insolvency · Macroeconomics · Microeconomics · Monetary economics · Risk management · Scale (ratio) · Banking stability, regulation, efficiency · Corporate Finance and Governance · Economic theories and models · Finance
| Unique citing works | 4 |
|---|---|
| Citations per year | 0.57 |
| Citation span | 2019 - 2025 (7) |
| Citation velocity | recent |
| Highly cited | No |
| Citation types | Neutral: 4 |