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

See all articles by Thierno Barry

Thierno Barry

Université de Limoges, LAPE

Alassane Diabaté

Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: December 21, 2018

Abstract

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

Barry, Thierno and Diabaté, Alassane and Tarazi, Amine, Market Liquidity Shortage and Banks' Capital Structure and Balance Sheet Adjustments: Evidence from U.S. Commercial Banks (December 21, 2018). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3221498 or http://dx.doi.org/10.2139/ssrn.3221498

Thierno Barry

Université de Limoges, LAPE ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

Alassane Diabaté

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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