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: Université de Limoges, LAPE, 5 rue Félix Eboué, 87031 Limoges Cedex, France
Alassane Diabaté: Université de Limoges, LAPE, 5 rue Félix Eboué, 87031 Limoges Cedex, France

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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; market liquidity shortage; capital structure adjustment (search for similar items in EconPapers)
Date: 2023-10-13
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Working Paper: Do banks adjust their capital when they face liquidity shortages? Evidence from U.S. commercial banks (2024)
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