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Bank's capital structure under non-diversifiable risk

Author

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  • Masaya Sakuragawa

    (Department of Economics, Nagoya City University, Yamanohata-1, Mizuho-cho, Mizuho-ku, Nagoya 467-8501, JAPAN)

Abstract

The aim of this paper is to study the design of optimal capital structure of a "large" intermediary when the intermediary faces a non-diversifiable risk, within the standard costly-state-verification (CSV) model. I demonstrate that, under weaker conditions, a "large" intermediary realizes more efficient allocation by issuing both debt and equity than by issuing only debt. Unlike Diamond (1984) and Williamson (1986), the set of optimal contracts involves ex ante monitoring made by shareholders of the intermediary. Changes in parameters, such as the variance of the aggregate risk or the cost of monitoring, affect bankruptcy costs and the capital structure.

Suggested Citation

  • Masaya Sakuragawa, 2002. "Bank's capital structure under non-diversifiable risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(1), pages 29-45.
    • Handle: RePEc:spr:joecth:v:20:y:2002:i:1:p:29-45
    Note: Received: October 12, 1998; revised version: March 20, 2001
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    More about this item

    Keywords

    Financial intermediation; Asymmetric information; Capital structure.;
    All these keywords.

    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

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