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

Author

Listed:
  • 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)

  • Alassane Diabaté
  • Amine Tarazi

    (UNILIM - Université de Limoges, LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges, IUF - Institut universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche)

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.

Suggested Citation

  • Thierno Amadou Barry & Alassane Diabaté & Amine Tarazi, 2024. "Do banks adjust their capital when they face liquidity shortages? Evidence from U.S. commercial banks," Post-Print hal-04678233, HAL.
    • Handle: RePEc:hal:journl:hal-04678233
    DOI: 10.1111/fmii.12207
    as

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