Countercyclical Bank Equity Issuance

Forthcoming, Review of Financial Studies

127 Pages Posted: 23 Jan 2017 Last revised: 14 Jan 2020

See all articles by Matthew Baron

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: January 13, 2020

Abstract

Over the period 1980-2012, large U.S. commercial banks raise and retain less equity during credit expansions, which amplifies their leverage. The decrease in equity issuance is large relative to subsequent banking losses. I consider a variety of explanations for why banks resist raising equity and find evidence consistent with the diminishment of creditor market discipline due to government guarantees. I test this explanation by analyzing the removal of government guarantees to German Landesbank creditors and find that creditor market discipline and equity issuance increase. These findings help explain why banks resist raising equity, making financial distress more likely.

Keywords: bank equity, capital requirements, government guarantees, financial stability

JEL Classification: G21, G28, G32, G35

Suggested Citation

Baron, Matthew, Countercyclical Bank Equity Issuance (January 13, 2020). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2902505 or http://dx.doi.org/10.2139/ssrn.2902505

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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