Abstract:
Using data on a sample of European banks, we investigate what determines banks' use of Additional Tier 1 (AT1) instruments in their capital structure. Banks' capital structure can potentially influence their funding costs, especially during market stress. Banks' capital structure might therefore be crucial in shaping bank behaviour during a crisis, such as whether they would continue lending or resort to shrinking their balance sheets to maintain a safe distance from regulatory requirements. This analysis suggests that banks with low capital headroom in particular use more AT1 - both to meet increases in capital requirements and during periods of market stress.