Liquidity Provision, Bank Capital, and the Macroeconomy
Gary B. Gorton
Yale School of Management; National Bureau of Economic Research (NBER)
University of Minnesota - Twin Cities - Carlson School of Management
January 25, 2014
We provide a theory of bank capital to evaluate the policy of using capital requirements to ensure the “safety and soundness” of the banking system. Bank capital is beneficial because it reduces the chance of privately and socially costly bank failure. But it is both privately and socially costly because a system-wide increase in bank capital reduces the aggregate amount of bank deposits, which are an efficient medium of exchange. Binding capital requirements may cause banks to exit the industry. Increased capital requirements may also increase bank asset risk, leading to no decrease in the banking system’s fragility.
Number of Pages in PDF File: 48
Keywords: Bank Capital, Liquidity
JEL Classification: G21, G28
Date posted: December 13, 2000 ; Last revised: February 3, 2014
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