Author(s):	Milton Harris, Christian Opp, Marcus M. Opp
Publication Date:	March 2020
Keyword(s):	Bailouts, bank capital, Composition of credit, Credit rationing, Crowding out, Institutional asset pricing, Non-bank competition, Overinvestment
JEL(s):	G12, G21, G23, G28
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=14524

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.