Liquidity Provision, Bank Capital, and the Macroeconomy

63 Pages Posted: 13 Dec 2000 Last revised: 24 Sep 2016

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: September 23, 2016

Abstract

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

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

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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Andrew Winton

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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