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Strategic Bank Liability Structure Under Capital Requirements

Author

Listed:
  • Suresh Sundaresan

    (Graduate School of Business, Columbia University, New York, New York 10027)

  • Zhenyu Wang

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

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.

Suggested Citation

  • Suresh Sundaresan & Zhenyu Wang, 2023. "Strategic Bank Liability Structure Under Capital Requirements," Management Science, INFORMS, vol. 69(10), pages 6349-6368, October.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:10:p:6349-6368
    DOI: 10.1287/mnsc.2022.4570
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