Corporate Debt Choice and Bank Capital Regulation

52 Pages Posted: 19 Dec 2016 Last revised: 23 Nov 2018

See all articles by Haotian Xiang

Haotian Xiang

University of Pennsylvania, The Wharton School

Date Written: March 17, 2018

Abstract

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

Xiang, Haotian, Corporate Debt Choice and Bank Capital Regulation (March 17, 2018). Available at SSRN: https://ssrn.com/abstract=2882235 or http://dx.doi.org/10.2139/ssrn.2882235

Haotian Xiang (Contact Author)

University of Pennsylvania, The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104
United States

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