Corporate Debt Choice and Bank Capital Regulation

Abstract

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