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Bank Capital and the Composition of Credit

59 Pages Posted: 19 Jul 2014 Last revised: 16 Aug 2017

Milton Harris

University of Chicago - Finance

Christian C. Opp

University of Pennsylvania - The Wharton School

Marcus M. Opp

Stockholm School of Economics - Department of Finance

Date Written: August 15, 2017

Abstract

A growing empirical literature highlights the importance of compositional changes in credit for economic activity, including the buildup of leverage and risk. We develop a model of the composition of credit that transparently identifies features of an economy determining which types of borrowers are primarily affected by changes to bank capital and regulations governing it. Our theory echoes the complexity of compositional changes, revealing that even increases in capital ratio requirements can locally increase banks' riskiness. We derive new testable predictions, e.g., on the relations between prices and regulatory risk weights, and between interest rate pass-through and bank capital scarcity.

Keywords: Risk-taking, Credit-rationing, Composition of credit supply, Bank regulation, Bailouts, FDIC insurance

JEL Classification: G21, G28

Suggested Citation

Harris, Milton and Opp, Christian C. and Opp, Marcus M., Bank Capital and the Composition of Credit (August 15, 2017). 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
United States
(773) 702-2549 (Phone)
(773) 753-8310 (Fax)

HOME PAGE: http://faculty.chicagobooth.edu/milton.harris/

Christian C. Opp

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-573-3186 (Phone)

Marcus M. Opp (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

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