Corporate Debt Choice and Bank Capital Regulation
52 Pages Posted: 19 Dec 2016 Last revised: 23 Nov 2018
Date Written: March 17, 2018
I investigate the impact of bank capital requirements in a business cycle model with corporate debt choice. Compared to non-bank investors, banks provide restructurable loans that reduce firm bankruptcy losses and enhance production efficiency. Raising capital requirements eliminates deposit insurance distortions but also deposit tax shields. As a result, firms cut back on both bank and non-bank borrowing while going bankrupt more frequently. Implementing an optimal capital ratio of 11 percent in the US produces limited marginal impacts on aggregate quantities and welfare.
JEL Classification: G28, E32
Suggested Citation: Suggested Citation