Capital shocks and bank growth-1973 to 1991
This article develops testable hypotheses
about the growth of financial intermediaries
under the assumption that issuing new equity is a
costly way for banks to smooth shocks to their
equity position. We draw heavily on previous
attempts to confirm the hypothesis that nonfinancial
firms are forced to rely strongly on internal
financing because of capital market imperfections.
The article has three goals. First, we
ask whether most banks manage their total assets
as if it is costly to raise additional equity from
external sources. Second, we examine how past
changes in capital requirements have affected
bank behavior. Finally, we explore the role that
various shocks to the depository system have
played in the recent slowdown in bank lending
and the monetary aggregates.
