Strategic Bank Liability Structure Under Capital Requirements

Suresh Sundaresan () and Zhenyu Wang ()
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Suresh Sundaresan: Graduate School of Business, Columbia University, New York, New York 10027
Zhenyu Wang: Kelley School of Business, Indiana University, Bloomington, Indiana 47405

Management Science, 2023, vol. 69, issue 10, 6349-6368

Abstract: Banks strategically choose and dynamically restructure deposits and nondeposit debt in response to the minimum requirements on total capital and tangible equity. We derive the optimal strategic liability structure and show that it minimizes the protection for deposits conditional on capital requirements. Although, given any liability structure, regulators can set capital requirements high enough to remove the incentive for risk substitution, the strategic response to the capital requirements always preserves this incentive. Banks reduce leverage but increase the proportion of nondeposit debt if regulations raise the capital requirements.

Keywords: liability structure; capital requirement; bank leverage; deposit insurance; bank regulation (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:10:p:6349-6368

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