An alternative, less stark view of the impact of regulation has banks holding capital buffers, or discretionary capital, above the regulatory minimum in order to avoid the costs associated with having to issue fresh equity at short notice (Ayuso et al., 2004, and Peura and Keppo, 2006). It follows that banks facing higher cost of issuing equity should be less levered. According to the buffer view, the cost of issuing equity is caused by asymmetric information (as in Myers and Majluf, 1984). Dividend paying banks, banks with higher profits or higher market–to-book ratios can therefore be expected to.
