Discussion paper

DP14524 The aggregate demand for bank capital

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.

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Citation

Opp, M, M Harris and C Opp (eds) (2020), “DP14524 The aggregate demand for bank capital”, CEPR Press Discussion Paper No. 14524. https://cepr.org/publications/dp14524