THE EUROPEAN CENTRAL BANK: HISTORY, ROLE AND FUNCTIONS

Alternatively, banks may be optimising their capital structure, possibly much like non- financial firms, which would relegate capital requirements to second order importance. Flannery (1994), Myers and Rajan (1998), Diamond and Rajan (2000) and Allen et al. (2009) develop theories of optimal bank capital structure, in which capital requirements are not necessarily binding. Non-binding capital requirements are also explored in the market discipline literature. 4 While the literature on bank market discipline is primarily concerned with banks’ risk taking, it also has implications for banks’ capital structures. Based on the market view, banks’ capital structures are the...