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Deposits and Bank Capital Structure

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  • Franklin Allen
  • Elena Carletti

Abstract

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. JEL Codes: G21, G32, G33 Keywords: Deposit finance, bankruptcy costs, bank diversification

Suggested Citation

  • Franklin Allen & Elena Carletti, 2013. "Deposits and Bank Capital Structure," Working Papers 477, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:477
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    Cited by:

    1. William Gornall & Ilya A. Strebulaev, 2013. "Financing as a Supply Chain: The Capital Structure of Banks and Borrowers," NBER Working Papers 19633, National Bureau of Economic Research, Inc.
    2. repec:eee:jfinec:v:125:y:2017:i:2:p:266-285 is not listed on IDEAS
    3. DeAngelo, Harry & Stulz, René M., 2015. "Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks," Journal of Financial Economics, Elsevier, vol. 116(2), pages 219-236.
    4. Harry DeAngelo & René M. Stulz, 2013. "Why High Leverage is Optimal for Banks," NBER Working Papers 19139, National Bureau of Economic Research, Inc.
    5. Sengupta, Rajdeep & Black, Lamont K. & Floros , Ioannis, 2016. "Raising capital when the going gets tough: U.S. bank equity issuance from 2001 to 2014," Research Working Paper RWP 16-5, Federal Reserve Bank of Kansas City.
    6. Juliane M. Begenau, 2015. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," Harvard Business School Working Papers 15-072, Harvard Business School, revised Sep 2016.
    7. Toni Ahnert & Enrico Perotti, 2015. "Cheap But Flighty: How Global Imbalances Create Financial Fragility," Staff Working Papers 15-33, Bank of Canada.
    8. Piero Gottardi & Douglas Gale, 2017. "Equilibrium Theory of Banks' Capital Structure," 2017 Meeting Papers 380, Society for Economic Dynamics.
    9. Jason Allen & James R. Thompson, 2016. "Capital Structure, Pay Structure and Job Termination," Staff Working Papers 16-12, Bank of Canada.
    10. Zouheir Bouchaddakh & Mohamed Mekki Ben Jemaa, 2016. "Risk Sharing Vs Risk Bearing and Shifting: Evidence from Conventional and Islamic Banks of MENA Region Using Metafrontier Directional Distance Functions," Working Papers 1042, Economic Research Forum, revised 09 Jan 2016.
    11. Juliane Begenau, 2015. "Capital Requirements, Risk Choice, and Liquidity Provision in a Business Cycle Model," 2015 Meeting Papers 687, Society for Economic Dynamics.
    12. repec:eee:finsta:v:30:y:2017:i:c:p:36-52 is not listed on IDEAS
    13. Bertsch, Christoph & Mariathasan, Mike, 2015. "Optimal Bank Capitalization in Crowded Markets," Working Paper Series 312, Sveriges Riksbank (Central Bank of Sweden), revised 01 Dec 2017.
    14. Mark Mink, 2016. "Aggregate liquidity and banking sector fragility," DNB Working Papers 534, Netherlands Central Bank, Research Department.
    15. Simas Kucinskas, 2015. "Liquidity Creation without Banks," Tinbergen Institute Discussion Papers 15-101/VI, Tinbergen Institute.
    16. Simas Kucinskas, 2015. "Liquidity creation without banks," DNB Working Papers 482, Netherlands Central Bank, Research Department.
    17. Hugonnier, Julien & Morellec, Erwan, 2015. "Bank Capital, Liquid Reserves, and Insolvency Risk," CEPR Discussion Papers 10378, C.E.P.R. Discussion Papers.
    18. Hong Chen & Murray Frank, 2016. "Are Direct Investments by the Federal Reserve a Good Idea? A Corporate Finance Perspective," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-48, September.

    More about this item

    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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