Bank Capital, Risk-Taking, and the Composition of Credit

55 Pages Posted: 19 Jul 2014 Last revised: 10 May 2017

Milton Harris

University of Chicago - Finance

Christian C. Opp

University of Pennsylvania - The Wharton School

Marcus M. Opp

University of California, Berkeley - Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 2017

Abstract

We propose a tractable general equilibrium framework of the composition of credit. Our model identifies which types of firms in the economy are primarily affected by bank capital and regulations governing it. We highlight the key role of the banking sector's "marginal borrower type" in shaping the impact of various policy changes. When the marginal borrower type is safe, even increases in capital ratio requirements can paradoxically locally increase banks' riskiness. The model yields a parsimonious asset pricing condition that provides testable predictions regarding the links between security 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, Risk-Taking, and the Composition of Credit (April 27, 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)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States

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