Market Freeze and Bank Capital Structure Heterogeneity

44 Pages Posted: 17 Sep 2020

See all articles by Fenghua Song

Fenghua Song

Pennsylvania State University - Smeal College of Business

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

Date Written: August 3, 2020

Abstract

This paper develops a theory in which heterogeneity in bank capital choices arises in a general equilibrium despite ex ante identical banks. In a future state, the credit market is partially frozen in a crisis - high-capital banks have continued access to funding liquidity but low-capital banks do not. Inter-bank trading in legacy assets allows some frozen banks to sell assets to banks with “financial muscle” to obtain funding. Consequently, there is a reallocation of access to market funding from low-capital to high-capital banks. Inter-bank trading unfreezes the market without government intervention.

Keywords: Market Freeze, Bank Capital, Short-Term Funding Reallocation

JEL Classification: G01, G20, G21

Suggested Citation

Song, Fenghua and Thakor, Anjan V., Market Freeze and Bank Capital Structure Heterogeneity (August 3, 2020). Available at SSRN: https://ssrn.com/abstract=3667175 or http://dx.doi.org/10.2139/ssrn.3667175

Fenghua Song (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814.863.4905 (Phone)

HOME PAGE: http://sites.google.com/site/fenghua8song/

Anjan V. Thakor

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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