Bank Capital and the Composition of Credit
59 Pages Posted: 19 Jul 2014 Last revised: 16 Aug 2017
Date Written: August 15, 2017
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: Suggested Citation