The redistributive effects of bank capital regulation

Elena Carletti, Roberto Marquez and Silvio Petriconi

No 18102, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We build a general equilibrium model of banks’ optimal capital structure, where bankruptcy is costly and investors have heterogenous endowments and incur a cost for participating in equity markets. We show that banks raise both deposits and equity, and that investors are willing to hold equity only if adequately compensated. We then introduce (binding) capital requirements and show that: (i) it distorts investment away from productive projects toward storage; or (ii) it widens the spread between the returns to equity and to deposits. These results hold also when we extend the model to incorporate various rationales justifying capital regulation.

Keywords: limited market participation; bank capital structure; capital regulation; investor returns (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 57
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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