Abstract
Equity issuance and changes in retained earnings are countercyclical across credit cycles for large U.S. banks after 1980. Thus, banks raise and retain less equity during credit expansions, which amplifies bank leverage. The decrease in issuance is large in magnitude relative to subsequent banking losses. I consider a variety of explanations why banks resist raising equity and find evidence most consistent with the diminishment of creditor market discipline due to government guarantees. I test this explanation by analyzing the staggered removal of government guarantees to German Landesbank creditors and find that creditor market discipline and equity issuance increase. These findings help explain why banks resist raising equity, making financial distress more likely.
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