Intermediary Capital and the Credit Market
54 Pages Posted: 19 Jul 2014 Last revised: 13 Aug 2023
Date Written: November 21, 2018
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, Bailouts, Credit rationing, Overinvestment, Crowding out, Intermediary asset pricing.
JEL Classification: G11, G12, G18, G21, G22, G23, G28
Suggested Citation: Suggested Citation