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The aggregate demand for bank capital

Milton Harris, Christian Opp and Marcus Opp ()

No 14524, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Bailouts; bank capital; Composition of credit; Credit rationing; Crowding out; Institutional asset pricing; Non-bank competition; Overinvestment (search for similar items in EconPapers)
JEL-codes: G12 G21 G23 G28 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-ban and nep-fdg
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