Capital shocks and bank growth-1973 to 1991
Herbert L. Baer , John N. McElravey
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.
