Target capital ratio and optimal channel(s) of adjustment: A simple model with empirical applications to European banks

Yann Braouezec and Keyvan Kiani
Additional contact information
Yann Braouezec: IÉSEG School Of Management [Puteaux]
Keyvan Kiani: IÉSEG School Of Management [Puteaux]

Post-Print from HAL

Abstract: Why do banks decide to reach their target capital ratio by selling assets and/or issuing new shares? To answer this question, we offer a simple framework in which each channel of adjustment is costly; underwriting and dilution costs for equity issuance, profit reduction and price impact for asset sale. We make the assumption that the aim of the bank is to minimize the total adjustment cost subject to the target's constraint and we derive its optimal strategy. The solution is formulated in terms of two critical thresholds for which we give an explicit formula. We then compare our model's predictions to the decisions taken by two European systemic banks (Deutsche Bank and UniCredit) to issue new shares in 2017 and for which the target ratio was publicly disclosed. We show that the predictions of the model are consistent with the observed decisions.

Keywords: Equity issuance; asset sale; price impact; target capital ratio; systemic banks (search for similar items in EconPapers)
Date: 2021-01-17
New Economics Papers: this item is included in nep-ban and nep-isf
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03341768v1
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Applied Economics, 2021, 53 (13), pp.1435-1462

Downloads: (external link)
https://shs.hal.science/halshs-03341768v1/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-03341768

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().