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Deposits and Bank Capital Structure

In: New Perspectives on Corporate Capital Structure

Listed author(s):
  • Franklin Allen
  • Elena Carletti
  • Robert Marquez

In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the choice of bank and firm capital structure and the cost of equity and deposit finance. Despite risk neutrality, equity capital is more costly than deposits. When banks directly finance risky investments, they hold positive capital and diversify. When they make risky loans to firms, banks trade off the high cost of equity with the diversification benefits from a lower bankruptcy probability. When bankruptcy costs are high, banks use no capital and only lend to one sector. When these are low, banks hold capital and diversify.

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This chapter was published in:
  • Viral V. Acharya & Heitor Almeida & Malcolm Baker, 2015. "New Perspectives on Corporate Capital Structure," NBER Books, National Bureau of Economic Research, Inc, number acha13-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 13270.
    Handle: RePEc:nbr:nberch:13270
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