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.