63 Pages Posted: 13 Dec 2000 Last revised: 24 Sep 2016
Date Written: September 23, 2016
New bank equity must come from somewhere. In general equilibrium, raising bank capital requirements means either that banks produce less short-term debt (as debt holders must become shareholders), or short-term debt is not reduced and the banking system acquires nonbank equity (as the shareholders in nonbanks become shareholders in banks). The welfare effects involve a trade-off because bank debt is special as it used for transactions purposes, but more bank capital can reduce the chance of bank failure (producing welfare losses).
Keywords: Bank Capital, Liquidity
JEL Classification: G21, G28
Suggested Citation: Suggested Citation
Gorton, Gary B. and Winton, Andrew, Liquidity Provision, Bank Capital, and the Macroeconomy (September 23, 2016). Available at SSRN: https://ssrn.com/abstract=253849 or http://dx.doi.org/10.2139/ssrn.253849
By Ross Levine