The Impact of Funding Structure and Capital Adequacy on Bank Credit: Risk in US Commercial Banks

Abstract

This dissertation examines the joint effects of funding structure and capital adequacy on credit risk in US commercial banks, addressing a critical gap in banking literature that has predominantly treated these factors independently. Using data from 785 US commercial banks spanning 2010-2022, the analysis employs interaction modelling to reveal that funding and capital operate through complementary mechanisms rather than independent channels. The central finding demonstrates that well-capitalised banks benefit from deposit funding with lower credit risk, while thinly capitalised banks face increased risk from deposit reliance. Small banks show 2.7 times greater sensitivity to funding decisions than large banks, with interaction effects strongest during post-crisis recovery periods (2010-2015). The results validate differentiated regulatory approaches while providing quantitative guidance for optimal balance sheet management. These findings advance banking theory by providing evidence of conditional relationships and offer precise policy recommendations for enhanced regulatory effectiveness and financial stability.