The redistributive effects of bank capital regulation

Elena Carletti, Robert Marquez and Silvio Petriconi

Journal of Financial Economics, 2020, vol. 136, issue 3, 743-759

Abstract: We present a general equilibrium model of banks’ optimal capital structure where bankruptcy is costly and investors have heterogeneous endowments and incur a cost for participating in equity markets. We show that, besides its social benefits, capital regulation benefits bank shareholders when it resolves fire sales externalities but not when it acts as a tax on bank profits such as when used to control excessive leverage induced by deposit insurance. Furthermore, capital regulation widens the gap between the returns to bank shareholders and depositors and may reduce investments in projects in favor of storage.

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)
Date: 2020
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:3:p:743-759

DOI: 10.1016/j.jfineco.2019.12.002

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