Do banks adjust their capital when they face liquidity shortages? Evidence from U.S. commercial banks

Thierno Amadou Barry, Alassane Diabaté and Amine Tarazi
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Thierno Amadou Barry: UNILIM - Université de Limoges, LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges

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Abstract: We investigate how small and large banks behave when they face liquidity shortages. Our findings reveal that only small banks increase their capital ratios during episodes of liquidity shortages. They do so by downsizing but also by holding less risky assets and by reducing their lending. Furthermore, the increase in capital ratios is higher for small banks which are more reliant on market liquidity and small banks operating below their target capital ratio. On the whole, our findings show that small banks operate prudently whereas large banks are less concerned. Our work has strong implications for bank regulation and supervision.

Keywords: Bank capital ratio; Capital structure adjustment; Market liquidity shortage (search for similar items in EconPapers)
Date: 2024-07-30
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Published in Financial Markets, Institutions and Instruments, 2024, ⟨10.1111/fmii.12207⟩

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Working Paper: Do banks adjust their capital when they face liquidity shortages? Evidence from U.S. commercial banks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04678233

DOI: 10.1111/fmii.12207

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