This document summarizes the results of a three-step regression analysis examining the target capital levels and speed of adjustment toward those targets for U.S. bank holding companies (BHCs). It finds that BHCs with lower initial capital levels adjust more quickly, with undercapitalized firms adjusting 31-65 percentage points faster than highly capitalized ones. It also finds BHCs adjust fastest toward leverage targets, slower toward Tier 1 capital targets, and slowest toward total capital targets. Adjustment speeds were variable but averaged 45-57% across models, implying most BHCs reach 91% of their target within 4 years. This exceeds speeds for non-financial firms but is consistent with prior research on banks subject to capital

1. Table5 (continue)
Step 1
Estimate
BBB
MISSING
Nobs
4.563
Mean fitted target
0.1302
Maximum
0.2563
Median
0.1286
Minimum
0.0295
Mean fitted adjustment speed
Maximum
Median
Minimum
Panel C: dependent variable is CAPTOTAL
Intercept
0.2000
STDEVROA
−0.3501
MKTBOOK
−0.0029
NMERGER
−0.0029
LNASSETS
−0.0035
D50B
−0.0328
D50B*LNASSETS
0.0020
RETAILDEP
0.0111
0.5632
INTERCEPT
WELLCAP_600TO800
WELLCAP_400TO600
WELLCAP_200TO400
WELLCAP_0TO200
ADEQCAP
UNDERCAP
SIG-UNDERCAP
BADBOPEC
JUNK
BBB
MISSING
Nops
4,563
Mean fitted target
0.1500
Maximum
0.2692
Median
0.1461
Minimum
0.0285
Mean fitted adjustment speed
Maximum
Median
Step 2
t-Stat Estimate
−0.0424
0.0053
4.563
11.83a
−1.86c
−2.31b
−2.37b
−4.64a
−0.74
0.83
1.49
11.08a
0.2044
0.0536
−0.0015
−0.0007
−0.0043
−0.1451
0.0084
0.0245
n.a.
0.5311
0.0329
0.0015
0.0061
0.0455
0.1105
0.1854
0.3195
−0.1855
0.0340
−0.0537
−0.0211
4,563
0.5172
0.2935
a
Statistical significance at the 1% levels
t-Stat
0.4523
1.0000
0.4532
0.2343
0.8295
0.5161
Minimum
Step 3
t-Stat Estimate
−1.07
0.18
4.563
0.1152
0.1810
0.1173
0.0397
17.94a
1.07
0.06
0.29
2.22b
3.74a
3.74a
4.48a
−8.04a
0.22
−1.45
−0.81
4,563
0.1548
0.2216
0.1536
0.0859
8.37a
0.37
−1.66c
−0.47
−2.60a
−2.12b
2.21b
3.23a
n.a.

2. b
Statistical significance at the 5% levels
c
Statistical significance at the 10% levels
the Wellcap_over800 category from the Zi,t−1
vector in regression (Eq.5); thus, we measure
the effect of initial capital adequacy on adjustment speed relative to the adjustment speed
of the most highly capitalized BHCs. Extraordinary supervisory pressure is measured by the
BADBOPEC dummy. Market pressure is reflected in the bond ratings BBB and JUNK. The
majority of our sample’s bank-years have no bond rating and these BHCs are identified bythe
dummy variable MISSING. Banks with poor capital market access (MISSING=1)
might be unable to adjust quickly to their target capital levels. Firms with a JUNK rating
(below BBB) might adjust very quickly back upward if they can, but they also might be in
such poor shape that recovering an investment grade rating may be effectively impossible.
Based on Kisgen’s(2006) analysis of nonfinancial firms’ bond ratings, we might expect
BHCs rated BBB, the lowest investment grade, to be particularly keen to reduce their
leverage.
Regression results for the speed-of-adjustment equations (the Step 2 estimation of Eq.7)
are reported in the center columns in each Panel of Table5. For the CAPLEV model in
Panel A, all of the capital-ratio dummy variables carry significantly positive coefficients.
Firms at or above the ADEQCAP capital level adjust toward their targets roughly 13 to 27
percentagepointsfaster than the most highly capitalized BHCs (the omitted category with
capital cushions greater than 800 basis points). Firms below the ADEQCAP capital level
adjust especially fast, roughly 31 and 65 percentage points faster, respectively, for the
UNDERCAP and SIG-UNDERCAP BHCs. These fast speeds suggest that troubled BHCs
rely at least partially on asset shrinkage as they adjust toward their targets. Note that these
adjustments would be predominantly in an upward direction, given that the mean CAPLEV
target from Step 1 (0.0830) is roughly 330 basis points above our assumed 5%
“wellcapitalized”minimum. BHCs with BADBOPEC ratings adjust toward their capital targets

3. more slowly than BHCs with better regulatory safety and soundness ratings, presumably
because they are unable to raise new capital effectively. Consistent with the conjecture that
BHCs with poor access to capital markets might be unable to adjust to their targets quickly,
we find a negative (though significant at only the 11% level) coefficient on BBB in Panel
A. We find no evidence of differential adjustment speeds for BHCs with JUNK or
MISSING bond ratings.
The results for CAPTIER1 and CAPTOTAL reported in Panels B and C broadly
resemble the CAPLEV results. In all three panels, as the amount of “excess”regulatory
capital at a BHC declines, the firm tends to adjust toward its capital target more quickly.
The only substantive difference is in the magnitudes of these adjustment speeds: wellcapitalized
BHCs adjust toward their CAPTIER1 targets substantially slower than toward
their CAPLEV targets, and adjust toward their CAPTOTAL targets more slowly than
toward their CAPTIER1 targets, all else equal.
There is a wide dispersion of adjustment speeds across BHCs, ranging across the three
panels from a low of 17% for the“slowest”BHC to 100% for the“fastest”BHC. These
variable adjustment speeds averaged 45%, 52%, and 57% across the three panels, only
slightly lower than the constrained adjustment speeds of 49%, 56%, and 60% (i.e., 1−
(1−l)) estimated in Step 1. Given that the speed of adjustment is theoretically bounded at
100%, these are large effects. For example, an adjustment speed of 45% implies that a firm
will cover 91% of the distance to its target in 4 years, i.e., 1−(1−0.45)4=0.9085. These
estimates exceed substantially the average adjustment speeds of 23% to 35% for nonfinancial
firms found in recent studies (Flannery and Rangan 2006; Lemmon et al. 2008;
Faulkender et al.2008), although Marcus (1984) reported adjustment speeds similar to ours
for large U.S. banks during the 1970s. It is possible that adjustment speeds are faster for
banking companies because they face capital-based regulation—if this is the case, then we
would expect to observe a pattern of asymmetric adjustment in which capital-poor banks
adjust upwards very fast, which is consistent with the large estimated coefficients on
ADEQCAP, UNDERCAP, and SIG-UNDERCAP discussed above.