Market Liquidity Shortage and Banks' Capital Structure and Balance Sheet Adjustments: Evidence from U.S. Commercial Banks
58 Pages Posted: 30 Jul 2018 Last revised: 8 Jan 2019
Date Written: December 21, 2018
Using quarterly data of U.S. commercial banks, we investigate the impact of market liquidity shortages on banks’ capitalization and balance sheet adjustments. Our findings reveal that an acute liquidity shortage leads small U.S. commercial banks, but not large ones, to positively adjust their total capital ratio. Small banks adjust their total capital ratio by downsizing, by restricting dividend payments, by decreasing the share of assets with higher risk weights and specifically by extending less loans. Furthermore, the positive impact on total capital ratios is stronger for small banks which are more reliant on market liquidity and small banks operating below their target capital ratio.
Keywords: bank capital ratio, market liquidity shortage, capital structure adjustment
JEL Classification: G21, G28
Suggested Citation: Suggested Citation