Countercyclical Bank Equity Issuance
125 Pages Posted: 23 Jan 2017 Last revised: 3 Jul 2019
Date Written: July 1, 2019
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 in magnitude relative to subsequent banking losses. I consider a variety of explanations 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