Intermediary capital and the credit market
Management Science (Forthcoming)
56 Pages Posted: 19 Jul 2014 Last revised: 4 Feb 2024
There are 3 versions of this paper
Intermediary capital and the credit market
The Aggregate Demand for Bank Capital
The Aggregate Demand for Bank Capital
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: Suggested Citation