... account the implied value of the adjustment speed. In practice, in order to capture the full effect of each of the N explanatory variables, we estimate (3) using two lags of each of these (t-1 ... affect the capacity to absorb losses, which may affect the market’s perception of the riskiness of the bank, we include the ratio of tier 1 over total capital as a proxy for the quality of capital ... capital requirement and, therefore, the amount of capital they must hold for their chosen loan supply, L. But, because they cannot liquidate these loans at time 1, they face possible capital...