TY - JOUR
T1 - Why do banks choose to finance with equity?
AU - Sorokina, Nonna Y.
AU - Thornton, John H.
AU - Patel, Ajay
N1 - Publisher Copyright:
© 2017 Elsevier B.V.
Copyright:
Copyright 2017 Elsevier B.V., All rights reserved.
PY - 2017/6/1
Y1 - 2017/6/1
N2 - A majority of U.S. banks between 1973 and 2012 held equity capital significantly beyond the required minimum. We study the risk-return tradeoff in connection with a bank's capital structure, and identify several new significant market factors that drive the level of equity capital in banks. During normal growth periods, bank leverage is negatively related to a level of competition and loan portfolio diversification, while high bank leverage is associated with low past liquidity. During recessions and expansions, the roles of those factors change following distortions in risk-return tradeoff. In distress, when banks approach regulatory capital requirements, market determinants of book leverage lose their significance; however, leverage does not decrease until a bank is within 1% of the minimal capital threshold.
AB - A majority of U.S. banks between 1973 and 2012 held equity capital significantly beyond the required minimum. We study the risk-return tradeoff in connection with a bank's capital structure, and identify several new significant market factors that drive the level of equity capital in banks. During normal growth periods, bank leverage is negatively related to a level of competition and loan portfolio diversification, while high bank leverage is associated with low past liquidity. During recessions and expansions, the roles of those factors change following distortions in risk-return tradeoff. In distress, when banks approach regulatory capital requirements, market determinants of book leverage lose their significance; however, leverage does not decrease until a bank is within 1% of the minimal capital threshold.
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U2 - 10.1016/j.jfs.2017.04.002
DO - 10.1016/j.jfs.2017.04.002
M3 - Article
AN - SCOPUS:85017595621
SN - 1572-3089
VL - 30
SP - 36
EP - 52
JO - Journal of Financial Stability
JF - Journal of Financial Stability
ER -