Why do banks decide to reach their target capital ratio by selling assets and/or issuing new shares when each channel of adjustment is costly? We offer a simple framework to answer this question in which the aim of the bank is to minimize the total adjustment cost subject to the target's...

We consider a price-mediated contagion framework in which each bank, after an exogenous shock, may have to sell assets in order to comply with regulatory constraints. Interaction between banks takes place only through price impact. We characterize the equilibrium of the strategic deleveraging...