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How Do Banks Build Equity Capital?
We examine the evolution of equity capital in the U.S. banking industry over the past thirty-five years. Earnings are the major driver of increases in equity capital in the banking industry. While common stock issuance is frequent, amounts issued are generally small and do not contribute meaningfully to equity capital growth in most cases. Common stock dividends and repurchases are significant drains on equity capital. It is not uncommon for banks to pay out more than they earn, driven both by capital planning motivations and negative shocks to earnings. It is also common for banks to both ...