Publication Date

1979

Document Type

Dissertation/Thesis

First Advisor

Wilbur, William L.

Degree Name

M.S. (Master of Science)

Department

Department of Finance

LCSH

Bank capital--Illinois--Chicago||Banks and banking--Illinois--Chicago

Abstract

The purpose of this study was to examine the following: 1. The techniques which the bank regulators and the Chicago Loop and suburban bankers employ to determine bank capital adequacy. 2. The characteristics of the common stock and the debt capital financing policies of the Chicago Loop and suburban banks. The information for this investigation was obtained primarily through the questionnaires which 50 bankers and 5 bank regulators completed. The writer supplemented the responses to the questionnaires with the interview technique and library research. Since the bankers in the sample indicated that they did not employ unconventional methods of raising capital (which include preferred stock, sale and leaseback transactions of bank premises, dividend reinvestment plans, convertible floating rate notes, subordinated debentures with warrants, and employee stock ownership plans), this study did not include a discussion of these sources of capital. The results of this study led the writer to make the following conclusions with respect to the methods of The purpose of this study was to examine the following: 1. The techniques which the bank regulators and the Chicago Loop and suburban bankers employ to determine bank capital adequacy. 2. The characteristics of the common stock and the debt capital financing policies of the Chicago Loop and suburban banks. The information for this investigation was obtained primarily through the questionnaires which 50 bankers and 5 bank regulators completed. The writer supplemented the responses to the questionnaires with the interview technique and library research. Since the bankers in the sample indicated that they did not employ unconventional methods of raising capital (which include preferred stock, sale and leaseback transactions of bank premises, dividend reinvestment plans, convertible floating rate notes, subordinated debentures with warrants, and employee stock ownership plans), this study did not include a discussion of these sources of capital. The results of this study led the writer to make the following conclusions with respect to the methods of evaluating bank capital adequacy: 1. The degree of variance among the methods of appraising a bank's capital position suggests that the process of evaluating bank capital adequacy is an art, not a science. 2. The bank regulators generally employ more complex techniques of appraising a bank's capital needs than the bankers in the sample. 3. The number of capital ratios that a bank employs appears to be related to the asset size of the peer group to which it belongs. With respect to the common equity and the debt capital financing policies of the banks in the sample, the results of this investigation led the author to make the following conclusions: 1. Bankers do not generally make capital financing decisions concerning cash dividends, stock dividends, stock splits, and the price and interest rate of debt capital by employing only a mathematical formula or a rule of thumb. 2. While cash dividends have been employed to a greater degree than stock dividends, stock dividends have been declared more frequently than stock splits. 3. The characteristics of a bank's common stock financing policies appear to be related to the asset size of the peer group to which it belongs. 4. Bankers do not consider preferred stock or convertible debt capital a practical means of raising capital. 5. The process of determining a bank's debt capital limit is an art, not a science. 6. Based on the results of this investigation, the author recommends that the federal and the state bank regulators develop a uniform procedure for evaluating a bank's capital needs. It would also be beneficial if the bank regulators held a conference to broaden the bankers' knowledge regarding the methods of evaluating bank capital adequacy. Such a conference could lead to a greater degree of communication and cooperation between the bankers and the bank regulators. With respect to the methods of raising bank capital, the author offers the following suggestions: 1. Bankers need to increase their banks' earning power and reduce costs. Seminars should be conducted periodically so that the bankers may update their procedures of profitability analysis and account analysis. Bankers should charge for their services on business loans instead of requiring a compensating balance. 2. Growth banks should employ a stable cash dividend policy supplemented with stock dividends. 3. Growth banks should consider the issuance of subordinated notes with a floating rate, a call provision, and a convertibility option. 4. Growth banks should consider a dividend reinvestment plan. 5. During a period of high interest rates, large banks with a high debt to equity ratio and a low price-earnings ratio should consider the issuance of preferred stock with a call provision and a convertibility option.

Comments

Includes bibliographical references.

Extent

ix, 196 pages

Language

eng

Publisher

Northern Illinois University

Rights Statement

In Copyright

Rights Statement 2

NIU theses are protected by copyright. They may be viewed from Huskie Commons for any purpose, but reproduction or distribution in any format is prohibited without the written permission of the authors.

Media Type

Text

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