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Deposits and Bank Capital Structure

Author

Listed:
  • Allen, Franklin

    (University of PA)

  • Carletti, Elena

    (Bocconi University)

  • Marquez, Robert

    (University of CA, Davis)

Abstract

In a model with bankruptcy costs and segmented deposit and equity markets, we endogenize the cost of equity and deposit finance for banks. Despite risk neutrality, equity capital earns a higher expected return than direct investment in risky assets. Banks hold positive capital to reduce bankruptcy costs, but there is a role for capital regulation when deposits are insured. Banks may no longer use capital when they lend to firms rather than invest directly in risky assets. This depends on whether the firms are public and compete with banks for equity capital, or private with exogenous amounts of capital.

Suggested Citation

  • Allen, Franklin & Carletti, Elena & Marquez, Robert, 2014. "Deposits and Bank Capital Structure," Working Papers 14-08, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:14-08
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    File URL: http://fic.wharton.upenn.edu/fic/papers/14/p1408.htm
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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