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Liquidity and bank capital structure

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  • Patel, Ajay
  • Sorokina, Nonna
  • Thornton, John H.

Abstract

Bank capital requirements reduce the probability of bank failure and help mitigate taxpayers’ sharing in the losses that result from bank failures. Under Basel III, direct capital requirements are supplemented with liquidity requirements. Our results suggest that liquidity provisions of banks are connected to bank capital and that changes in liquidity indirectly affect the capital structure of financial institutions. Liquidity appears to be another instrument for adjusting bank capital structure beyond just capital requirements. Consistent with Diamond and Rajan (2005), we find that liquidity and capital should be considered jointly for promoting financial stability.

Suggested Citation

  • Patel, Ajay & Sorokina, Nonna & Thornton, John H., 2022. "Liquidity and bank capital structure," Journal of Financial Stability, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:finsta:v:62:y:2022:i:c:s1572308922000602
    DOI: 10.1016/j.jfs.2022.101038
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    More about this item

    Keywords

    Capital structure; Leverage; Bank; Regulatory capital requirements; Competition; Diversification; Liquidity; Basel III; SIFI; BHC; Merger;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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