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The redistributive effects of bank capital regulation

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  • Carletti, Elena
  • Marquez, Robert
  • Petriconi, Silvio

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.

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  • Carletti, Elena & Marquez, Robert & Petriconi, Silvio, 2020. "The redistributive effects of bank capital regulation," Journal of Financial Economics, Elsevier, vol. 136(3), pages 743-759.
    • Handle: RePEc:eee:jfinec:v:136:y:2020:i:3:p:743-759
    DOI: 10.1016/j.jfineco.2019.12.002
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    More about this item

    Keywords

    Limited market participation; Bank capital structure; Capital regulation; Investor returns;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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