Corporate Debt Choice and Bank Capital Regulation
49 Pages Posted: 19 Dec 2016 Last revised: 2 Aug 2022
Date Written: August 2, 2022
This paper proposes a macro-banking model with corporate debt choice and investigates the impacts of bank capital regulation. Compared to non-banks, banks provide restructurable debt that resolves firm liquidations. Capital regulation corrects deposit insurance distortions but reduces bank debt supply. The model calibrated to the U.S. economy suggests that the non-bank market booms in the short run but shrinks in the long run when capital requirements are tightened. While banks get stabilized, firms encounter liquidations more frequently despite their deleveraging. Welfare improves under tighter and counter-cyclical capital requirements.
Keywords: Capital requirements, non-banks, debt complementarity
JEL Classification: G28, E32
Suggested Citation: Suggested Citation