The Redistributive Effects of Bank Capital Regulation
57 Pages Posted: 20 Dec 2018
Date Written: December 2018
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: Suggested Citation