Liquidity and bank capital structure

Ajay Patel, Nonna Sorokina and John Thornton

Journal of Financial Stability, 2022, vol. 62, issue C

Abstract: Bank capital requirements reduce the probability of bank failure and help mitigate taxpayers’ sharing in the losses that result from bank failures. Under Basel III, direct capital requirements are supplemented with liquidity requirements. Our results suggest that liquidity provisions of banks are connected to bank capital and that changes in liquidity indirectly affect the capital structure of financial institutions. Liquidity appears to be another instrument for adjusting bank capital structure beyond just capital requirements. Consistent with Diamond and Rajan (2005), we find that liquidity and capital should be considered jointly for promoting financial stability.

Keywords: Capital structure; Leverage; Bank; Regulatory capital requirements; Competition; Diversification; Liquidity; Basel III; SIFI; BHC; Merger (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:62:y:2022:i:c:s1572308922000602

DOI: 10.1016/j.jfs.2022.101038

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