The Aggregate Demand for Bank Capital
54 Pages Posted: 19 Jul 2014 Last revised: 25 Nov 2018
Date Written: November 21, 2018
We propose a novel conceptual approach to characterizing the credit market equilibrium in economies with multi-dimensional borrower heterogeneity. Our method is centered around a micro-founded representation of borrowers' aggregate demand correspondence for bank capital. The framework yields closed-form expressions for the composition and pricing of credit, including a sufficient statistic for the provision of bank loans. Our analysis sheds light on the roots of compositional shifts in credit toward risky borrowers prior to the most recent crises in the U.S. and Europe, as well as the macroprudential effects of bank regulations, policy interventions, and financial innovations providing alternatives to banks.
Keywords: Institutional asset demand and pricing, Composition of credit, Bank capital, Non-bank competition, Bailouts, Credit-rationing, Overinvestment, Crowding out.
JEL Classification: G11, G12, G18, G21, G22, G23, G28
Suggested Citation: Suggested Citation