Capital Structure in Banking

FRBSF ECONOMIC LETTER 2009-37   December 7, 2009 majuscule Structure in Banking BY SIMON KWAN Capital structure theories seek to explain why businesses choose several(predicate) mixes of debt and equity to finance their operations. Banking firms represent a special subject because of certain unique features in the industry, including a federal refuge net and extensive regulation. The financial crisis of the past two long time provided another set of special circumstances in which banks call for to raise capital. The preference banks have shown for issuing preferred shares in the private market in favor of government financial backing cigaret be viewed through the lenses of capital structure theories. The disoblige of capital has been fundamental for U.S. banks over the past two years, a period marked by the worst financial crisis since the dandy Depression. Bank capital has been under severe stress as a result of massive write-downs of bad assets and losses on real-estate-related lending. Many banks have sought to rebuild capital by raising money in the private markets. At the aforementioned(prenominal) time, the federal government has directly injected preferred equity into banks. This stinting Letter examines the applicability of capital structure theory to the capital-raising efforts of U.S. banks.

well-worn capital structure theory in corporate finance A seminal paper by Modigliani and Miller (1958) shows that, in perfect capital markets, financing does not matter because the jimmy of the firm is independent of how equity and debt claims are structured. The paper provides brawny insights into the separation of investment and financing decisions. With perfect capital markets, what happens on the left side of the rest period sheet that determines firm prise is independent of the financing on the right side of the balance sheet. In practice, however, capital markets are imperfect and financing distinctly does matter. With these imperfections, or financial frictions, the value of a firm can increase or... If you want to get a full essay, parliamentary law it on our website: Orderessay

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