The Aggregate Demand for Bank Capital
56 Pages Posted: 19 Jul 2014 Last revised: 14 May 2020
Date Written: March 29, 2020
We propose a novel conceptual approach to transparently characterizing credit market outcomes in economies with multi-dimensional borrower heterogeneity. Based on characterizations of securities' implicit demand for bank equity capital, we obtain closed-form expressions for the composition of credit, including a sufficient statistic for the provision of bank loans, and a novel cross-sectional asset pricing relation for securities held by regulated levered institutions. Our framework sheds light on the compositional shifts in credit prior to the 07/08 financial crisis and the European debt crisis, and can provide guidance on the allocative effects of shocks affecting both banks and the cross-sectional distribution of borrowers.
Keywords: Risk-taking, Credit-rationing, Composition of credit supply, Bank regulation, Bailouts, FDIC insurance
JEL Classification: G21, G28
Suggested Citation: Suggested Citation