The Aggregate Demand for Bank Capital

57 Pages Posted: 25 Mar 2020

See all articles by Milton Harris

Milton Harris

University of Chicago - Finance

Christian C. Opp

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

Marcus M. Opp

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020

Abstract

We propose a novel conceptual approach to transparently characterizing credit market outcomes in economies with multi-dimensional borrower heterogeneity. Based on characterizations of securities' implicit demand for bank equity capital, we obtain closed-form expressions for the composition of credit, including a sufficient statistic for the provision of bank loans, and a novel cross-sectional asset pricing relation for securities held by regulated levered institutions. Our framework sheds light on the compositional shifts in credit prior to the 07/08 financial crisis and the European debt crisis, and can provide guidance on the allocative effects of shocks affecting both banks and the cross-sectional distribution of borrowers.

Keywords: Bailouts, bank capital, Composition of credit, Credit rationing, Crowding out, Institutional asset pricing, Non-bank competition, Overinvestment

JEL Classification: G12, G21, G23, G28

Suggested Citation

Harris, Milton and Opp, Christian C. and Opp, Marcus M., The Aggregate Demand for Bank Capital (March 2020). CEPR Discussion Paper No. DP14524, Available at SSRN: https://ssrn.com/abstract=3560332

Milton Harris (Contact Author)

University of Chicago - Finance ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/milton.harris/

Christian C. Opp

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marcus M. Opp

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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