DP14524 The aggregate demand for bank capital
|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.