1. Comment: Ultimate Ownership Structure and Bank Regulatory Capital Adjustment: Evidence from European Commercial Banks Chung-Hua Shen Department of Finance National Taiwan University

2. Four contributions 1.new data on UOs’ voting and cash-flow rights of 405 commercial banks across 17 Western European countries during 2003-2010. – Previous studies: only focus on the largest publicly listed banks at a given point in time (one year) – This study: for both publicly listed and privately owned banks for the years 2004, 2006 and 2010. 2.Whether control/ownership divergence affects bank's capital adjustment speed: it has not been addressed before. 3.focusing on Europe  Wedge is more acute in Europe compared to other countries with more diffused ownership (La Porta et al. 1998)  draw policy implications 4.regarding core Tier 1 and draw potential implications.

3. Rationale max shareholders’ value  adjust capital structure  capital adjustment to target capital ratio  issuing new equity might dilute controlling shareholder’s (UO) control while repurchasing equity might enhance it  high expropriation costs ( control dilution costs ) ∵ fear control dilution  UO with high wedge might have stronger incentives to avoid financing decisions which could threaten their position  ∴ – lower adjust speed if the bank has to adjust its equity capital upwards  imply the reluctance to increase equity capital – higher adjust speed if a downward adjustment is required During crisis  ∵ fear bank failure, UO might intervene to support (prop up) the bank  ∴ the reluctance to increase equity capital should be less apparent

4. purpose whether a bank's decision to adjust its capital is influenced by the existence of a divergence between the voting and the cash-flow rights of its ultimate owner.

5. Methods 1.Partial capital adjustment model – It needs to estimate the Target Capital Ratio 2.Ownership Augmented Capital Adjustment Model – We introduce flexibility to allow for asymmetric upward and downward adjustment speeds.

6. Ownership Augmented Capital Adjustment Model

8. Very Interesting Paper, my comment is simple Why are we interested in K/A but not CAR? That is, why is there an optimal K/A, not not optimal CAR? Authors say: because of these adjustment costs, banks usually hold capital buffers, i.e. regulatory capital ratios above the minimum requirement and are likely to adjust their capital ratios by modifying the size of their balance sheets and/or by changing their risk exposure by substituting safe assets to risky assets Do we call it leverage ratio?

9. The authors discuss the capital adjustment from the view of optimal capital structure in non-financial firms, and use this idea to investigate banking industry. However, what is optimal capital structure in banking industry? Is optimal capital structure a main concern to banks?

10. 2. The authors argue that banks would adjust capital upwards slowly due to the fear of duiltion of control power. The presumption is that banks have target capital ratios which are proxied by Tier 1 ratio. however, most banks do not need to adjust upwards because they meet the requirement of Tier 1 regulatory ratio, otherwise, they would be imposed PCA. Only few bankswould adjust upwards. The reason could possible be that they are in distress.