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How Do Banks Build Equity Capital?

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Abstract

We examine the evolution of equity capital in the U.S. banking industry over the past thirty-five years. Earnings are the major driver of increases in equity capital in the banking industry. While common stock issuance is frequent, amounts issued are generally small and do not contribute meaningfully to equity capital growth in most cases. Common stock dividends and repurchases are significant drains on equity capital. It is not uncommon for banks to pay out more than they earn, driven both by capital planning motivations and negative shocks to earnings. It is also common for banks to both issue new common stock and make repurchases in the same year, with these offsetting actions related to employee stock-based compensation.

Suggested Citation

  • Lily Gordon & Beverly Hirtle, 2025. "How Do Banks Build Equity Capital?," Staff Reports 1174, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:102268
    DOI: 10.59576/sr.1174
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    References listed on IDEAS

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    1. Su, Yang & Zhang, Junrui & Zhao, Hong & Zhou, Mingming, 2025. "Other comprehensive income volatility and bank risk," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 99(C).
    2. Moore, David, 2023. "Strategic repurchases and equity sales: Evidence from equity vesting schedules," Journal of Banking & Finance, Elsevier, vol. 146(C).
    3. Shin, Hyun Song, 2022. "Dividends and Bank Capital in the Global Financial Crisis of 2007-2009," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(2), pages 1-39, April.
    4. Viral V. Acharya & Hanh T. Le & Hyun Song Shin, 2017. "Bank Capital and Dividend Externalities," The Review of Financial Studies, Society for Financial Studies, vol. 30(3), pages 988-1018.
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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