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Deposits and Bank Capital Structure

49 Pages Posted: 23 Mar 2013 Last revised: 24 May 2014

Franklin Allen

Imperial College London

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Robert Marquez

University of California, Davis

Date Written: May 12, 2014

Abstract

In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the cost of equity and deposit finance for banks. Despite risk neutrality, equity capital earns a higher expected return than direct investment in risky assets. Banks hold positive capital to reduce bankruptcy costs, but there is a role for capital regulation when deposits are insured. Banks may no longer use capital when they lend to firms rather than invest directly in risky assets. This depends on whether the firms are public and compete with banks for equity capital, or private with exogenous amounts of capital.

Keywords: Deposit finance, bankruptcy costs, regulation

JEL Classification: G21, G32, G33

Suggested Citation

Allen, Franklin and Carletti, Elena and Marquez, Robert, Deposits and Bank Capital Structure (May 12, 2014). Available at SSRN: https://ssrn.com/abstract=2238048 or http://dx.doi.org/10.2139/ssrn.2238048

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Elena Carletti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Robert S. Marquez

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

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