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Bank liability structure under capital requirements in a regime-switching framework

Author

Listed:
  • Huang, Wenli
  • Liu, Xiang
  • Niu, Yingjie
  • Yang, Kezhen

Abstract

We develop a regime-switching banking model that incorporates deposit insurance and dual bankruptcy thresholds—one endogenously determined by shareholders and the other exogenously imposed by regulators. Quantitative results indicate that rigid capital regulation tends to amplify risk during economic downturns, while countercyclical adjustments contribute to greater financial stability. Capital regulation should be state-dependent; otherwise, excessively stringent regulation may induce higher leverage, whereas insufficient oversight may undermine regulatory effectiveness. The findings also highlight a trade-off between capital requirements and financial stability. These insights offer guidance for designing countercyclical capital frameworks that help stabilize bank behavior throughout the business cycle.

Suggested Citation

  • Huang, Wenli & Liu, Xiang & Niu, Yingjie & Yang, Kezhen, 2026. "Bank liability structure under capital requirements in a regime-switching framework," Journal of Economic Dynamics and Control, Elsevier, vol. 188(C).
    • Handle: RePEc:eee:dyncon:v:188:y:2026:i:c:s0165188926000849
    DOI: 10.1016/j.jedc.2026.105338
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    Keywords

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    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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