Bank capital and balance sheet management during times of distress: international evidence

This paper studies how banks manage their equity capital in the short run, particularly during periods of distress, based on Basel III monitoring data. The findings challenge the conventional assumption that bank capital is largely exogenous in the short run, meaning that banks cannot adjust their capital level in a period in response to distress, capital targets and/or growth opportunities in the same period. In contrast, the authors' findings highlight the active forward-looking role of bank management in adjusting capital levels to meet these challenges, even in the short run. Hence, existing studies that treat bank capital as fixed in the short run tend to underestimate the ability of banks to adjust to changes in their operating environment such as changes to regulatory requirements or bank-specific distress.