Intermediary capital and the credit market

Management Science (Forthcoming)

56 Pages Posted: 19 Jul 2014 Last revised: 4 Feb 2024

See all articles by Milton Harris

Milton Harris

University of Chicago - Finance

Christian C. Opp

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: January 22, 2024

Abstract

We propose a tractable framework to examine the role of intermediary capital in the allocation and pricing of credit. In our model, regulated financial intermediaries compete with unregulated investors, targeting distributions of heterogeneous borrowers. We derive a sufficient statistic that characterizes intermediaries' cross-sectional lending decisions and provide a novel intermediary asset pricing equation that accounts for the endogenous segmentation of marginal investors across securities. These formulae reveal the central role of intermediaries' shadow cost of capital in both credit allocation and pricing. Our results can concurrently rationalize a broad array of empirical facts documented in the context of credit markets.

Keywords: Composition of credit, Intermediary asset pricing, Credit rationing, Public market substitution, Capital Regulation.

JEL Classification: G21, G28

Suggested Citation

Harris, Milton and Opp, Christian C. and Opp, Marcus M., Intermediary capital and the credit market (January 22, 2024). Management Science (Forthcoming), Available at SSRN: https://ssrn.com/abstract=2467761 or http://dx.doi.org/10.2139/ssrn.2467761

Milton Harris

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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HOME PAGE: http://faculty.chicagobooth.edu/milton.harris/

Christian C. Opp

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marcus M. Opp (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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