Endogenous Capital and Profitability in Banking

This paper investigates the relation between bank capital and profitability. To my knowledge, no previous paper has analysed this problem in a two-equation structural model. Contrary to what is reported with surprising frequency in this field of research, the results show no statistically significant relationship between capital and profitability. Given non-binding capital requirements this finding is consistent with the view that, while raising capital is costly for banks, it is associated with compensating benefits that offset these additional costs. Consequently, when capital structure is endogenously determined in a profit maximising equilibrium, no systematic relation between capital and profit is expected.

A Theory of Precautionary Regulatory Capital in Banking

The orthodox assumption in the banking literature is that capital requirements are a binding constraint on banking behaviour. This is in conflict with the empirical observation that banks hold a bu¤er of capital well in excess of the minimum requirements. This paper develops a model where capital is endogenously determined within a profit maximising equilibrium. Optimality involves balancing the reduction in expected costs associated with regulatory breach with the excess cost of financing from increasing capital. We demonstrate that when the equilibrium probability of regulatory breach is less than one half, banks are expected to hold precautionary capital.

Phase Transition in Heisenberg Stacked Triangular Antiferromagnets: End of a Controversy

By using the Wang-Landau flat-histogram Monte Carlo (MC) method for very large lattice sizes never simulated before, we show that the phase transition in the frustrated Heisenberg stacked triangular antiferromagnet is of first-order, contrary to results of earlier MC simulations using old-fashioned methods. Our result lends support to the conclusion of a nonperturbative renormalization group performed on an effective Hamiltonian. It puts an end to a 20-year long controversial issue.Comment: 4 pages, 7 figure