Question

When it comes to raising bank capital, I would think that banks would be more willing to reduce their assets because issuing more common stock can ultimately reduce earnings per share which would make shareholders of the bank unhappy. I also assume that reducing dividends also makes shareholders unhappy. Thus, bank managers would be more willing to compromise the size of the bank rather than upset shareholders

Are banks more likely to reduce assets and shrink the size of the bank rather than issue more equity or cut dividends? Is this more often than not the case?/Are there ways to incentivize banks to do the opposite and issue common stock or cut dividends rather than reduce its assets?

Answer 1

Banks are more reluctant to shrink asset sizes as assets have depreciation and amortisation which causes them to selloff to raise capital.

However other ways can also be used rsther thsn raisng common stock or cutting dividend. Banks can dilute their equity holding and selloff to new shareholders and also issuing offer for sale and bonds and debentures to raise capital which keeps shareholders happier due to higher free operating cash flows.

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