We develop a general equilibrium model of banks' capital structure, featuring heterogeneous portfolio risk and an … imperfectly elastic supply of bank equity stemming from financial market segmentation. In our model, equity is costly and serves … as a buffer against insolvency. Banks are ex-ante identical, but may need to recapitalize by selling equity claims after …

We examine the optimal size and composition of banks' total loss absorbing capacity (TLAC). Optimal size is driven by …

-shifting phenomena on banks' assets, notably when price-to-book values are below one, may increase the overall risk of the bank, and … must be carefully analysed before endorsing the general statement that “bank equity is not expensive”. In fact, specific … explicit/implicit government guarantees, and c) the risk-shifting behaviour of banks' equity holders. To highlight these issues …

risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity … remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost … benefit. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking …

theory. In addition, for banks with low capital adequacy ratio, capital and risk adjustment are negatively correlated. This … applies to the verification of bankruptcy cost avoidance theory and managerial risk aversion theory. Finally, banks with lower … verification of bankruptcy cost avoidance theory and managerial risk aversion theory. Finally, banks with lower capital ratio will …

This paper investigates whether European banks have capital targets and how deviations from the target impact their … equity composition and activity mix. Using quarterly data for a sample of large European banks between 2004 and 2011, we show … that there are notable asymmetries in banks' reactions to deviations from optimal capital levels. Banks prefer to reshuffle …

We exploit variation in commercial bank capital ratios across states to identify the impact of commercial bank balance … indicate a lack of substitutes for bank funding both in the short and long run. This lack of substitutes implies a notable … highlight the potential effects that bank balance sheet pressures, for example, from tightening capital adequacy standards, such …