Countercyclical Bank Equity Issuance
Forthcoming, Review of Financial Studies
127 Pages Posted: 23 Jan 2017 Last revised: 14 Jan 2020
Date Written: January 13, 2020
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: Suggested Citation