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 …

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 …

-response analysis shows that in response to a shock to bank capital, banks boost capital ratios by reducing their relative exposure to …We contribute to the empirical literature on the impact of shocks to bank capital in the euro area by estimating a … economy, namely a demand shock and a shock to bank capital. The main findings of the paper are as follows: i) Impulse …