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This paper examines the role of bank capital in decision-making by bank holding companies (BHCs) in the United States. Following Chami and Cosimano’s (2001) call option approach to bank capital, BHCs optimally choose the amount of capital to insure the bank against becoming capital constrained in the future. We provide empirical support for this model, and find that a higher optimal level of capital leads to higher loan rates. Furthermore, higher loan rates result in lower amounts of lending. Thus, an increase in capital requirements is likely to lead to higher loan rates and a significant reduction in lending.

Bank capital -- United States -- Econometric models. --- Bank holding companies -- United States -- Econometric models. --- Bank loans -- United States -- Econometric models. --- Banks and Banking --- Financial Risk Management --- Money and Monetary Policy --- Industries: Financial Services --- Investments: Stocks --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Institutions and Services: Government Policy and Regulation --- Financial Crises --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Finance --- Financial services law & regulation --- Banking --- Economic & financial crises & disasters --- Monetary economics --- Investment & securities --- Loans --- Capital adequacy requirements --- Financial crises --- Bank credit --- Financial institutions --- Financial regulation and supervision --- Money --- Stocks --- Asset requirements --- Banks and banking --- Credit --- United States