Over the period 1980–2012, large U.S. commercial banks raise and retain less equity during credit expansions, which amplifies their leverage. The decrease in equity issuance is large relative to subsequent banking losses. I consider a variety of explanations for why banks resist raising equity and find evidence consistent with the diminishment of creditor market discipline due to government guarantees. I test this explanation by analyzing the 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. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress with and without banking panics. To do this, we construct a new data set on bank equity returns and narrative information on banking panics for 46 countries over the period of 1870 to 2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. Although panics are an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We use bank equity returns to uncover a number of forgotten historical banking crises and create a banking crisis chronology that distinguishes between bank equity losses and panics.