Deposits and Bank Capital Structure

Franklin Allen and Elena Carletti ()

No 477, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the choice of bank and firm capital structure and the cost of equity and deposit finance. Despite risk neutrality, equity capital is more costly than deposits. When banks directly finance risky investments, they hold positive capital and diversify. When they make risky loans to firms, banks trade off the high cost of equity with the diversification benefits from a lower bankruptcy probability. When bankruptcy costs are high, banks use no capital and only lend to one sector. When these are low, banks hold capital and diversify. JEL Codes: G21, G32, G33 Keywords: Deposit finance, bankruptcy costs, bank diversification

Date: 2013
New Economics Papers: this item is included in nep-ban and nep-cwa
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Related works:
Journal Article: Deposits and bank capital structure (2015)
Working Paper: Deposits and Bank Capital Structure (2014)
Chapter: Deposits and Bank Capital Structure (2013)
Working Paper: Deposits and Bank Capital Structure (2013)
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