BANK CAPITAL SHOCKS - DYNAMIC EFFECTS ON SECURITIES, LOANS, AND CAPITAL

We used quarterly data for individual banks to estimate recent dynamic responses to bank capital shocks. While it took bank capital and securities only one year to adjust to capital shocks, liabilities and most loan categories took two to three years to complete their adjustments. Compared with those in the late 1980s, capital shocks were twice as large and portfolio responses to capital shocks tended to be more rapid in the early 1990s. Larger banks adjusted each component of their portfolios faster than smaller banks. Capital shocks caused banks with capital shortfalls to contract more and more quickly in the 1990s than they had in the 1980s.