The Redistributive Effects of Bank Capital Regulation

57 Pages Posted: 20 Dec 2018

See all articles by Elena Carletti

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Robert Marquez

University of California, Davis

Silvio Petriconi

Bocconi University; IGIER

Date Written: December 2018

Abstract

We build a general equilibrium model of banks’ optimal capital structure, where bankruptcy is costly and investors have heterogenous endowments and incur a cost for participating in equity markets. We show that banks raise both deposits and equity, and that investors are willing to hold equity only if adequately compensated. We then introduce (binding) capital requirements and show that: (i) it distorts investment away from productive projects toward storage; or (ii) it widens the spread between the returns to equity and to deposits. These results hold also when we extend the model to incorporate various rationales justifying capital regulation.

Keywords: limited market participation, bank capital structure, capital regulation, investor returns

JEL Classification: G21, G28

Suggested Citation

Carletti, Elena and Marquez, Robert S. and Petriconi, Silvio, The Redistributive Effects of Bank Capital Regulation (December 2018). BAFFI CAREFIN Centre Research Paper No. 2018-102. Available at SSRN: https://ssrn.com/abstract=3304485 or http://dx.doi.org/10.2139/ssrn.3304485

Elena Carletti (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Robert S. Marquez

University of California, Davis ( email )

One Shields Avenue
Davis, CA 95616
United States

Silvio Petriconi

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://silviopetriconi.github.io

IGIER ( email )

Via Roentgen 1
Milan, 20136
Italy

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