Optimal bank capitalization in crowded markets

Arbeitspapier

We study banks' optimal equity buffer in general equilibrium and their response to under-capitalization. Making progress towards a "pecking order theory" for private recapitalizations, our benchmark model identifies equity issuance as individually and socially optimal, compared to deleveraging, as well as conditions that invert the individually optimal ranking. Imperfectly elastic supply of capital, incomplete insurance markets and costly bankruptcies give rise to inefficiently high leverage ex-ante, and to excessive capital shortfalls and insolvencies ex-post. Abstracting from moral hazard and informational asymmetries, we therefore provide a novel rationale for macroprudential capital regulation and new testable implications about banks' capital structure management.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Sveriges Riksbank Working Paper Series ; No. 312

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Bank capital ; recapitalization ; macroprudential regulation ; incomplete markets ; financial market segmentation ; constrained inefficiency

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bertsch, Christoph ; Mariathasan, Mike
• Event: Veröffentlichung
• (who): Sveriges Riksbank
• (where): Stockholm
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/189927
• Last update: 10.03.2025, 11:41 AM CET