Strategic Bank Liability Structure Under Capital Requirements

56 Pages Posted: 14 Sep 2014 Last revised: 4 Apr 2022

See all articles by Suresh M. Sundaresan

Suresh M. Sundaresan

Columbia University - Columbia Business School, Finance

Zhenyu Wang

Indiana University, Kelley School of Business

Date Written: March 1, 2014

Abstract

Banks strategically choose and dynamically restructure deposits and non-deposit debt in response to the minimum requirements on total capital and tangible equity. We derive the optimal strategic liability structure and show that it minimizes the protection for deposits, conditional on capital requirements. Although given any liability structure, regulators can set capital requirements high enough to remove the incentive for risk substitution, the strategic response to the capital requirements always preserves this incentive. Banks reduce leverage but increase the proportion of non-deposit debt if regulations raise the capital requirements.

Suggested Citation

Sundaresan, Suresh M. and Wang, Zhenyu, Strategic Bank Liability Structure Under Capital Requirements (March 1, 2014). Available at SSRN: https://ssrn.com/abstract=2495579 or http://dx.doi.org/10.2139/ssrn.2495579

Suresh M. Sundaresan

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

Zhenyu Wang (Contact Author)

Indiana University, Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

HOME PAGE: http://www.kelley.iu.edu/Finance/Faculty/page12594.cfm?ID=37555

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
855
Abstract Views
4,057
rank
39,564
PlumX Metrics