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Liquidity Provision, Bank Capital, and the Macroeconomy

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  • GARY GORTON
  • ANDREW WINTON

Abstract

New bank equity must come from somewhere. In general equilibrium, raising bank capital requirements means either that banks produce less short‐term debt (as debt holders must become shareholders), or short‐term debt is not reduced and the banking system acquires nonbank equity (as the shareholders in nonbanks become shareholders in banks). The welfare effects involve a trade‐off because bank debt is special as it is used for transactions purposes, but more bank capital can reduce the chance of bank failure (producing welfare losses).

Suggested Citation

  • Gary Gorton & Andrew Winton, 2017. "Liquidity Provision, Bank Capital, and the Macroeconomy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(1), pages 5-37, February.
    • Handle: RePEc:wly:jmoncb:v:49:y:2017:i:1:p:5-37
    DOI: 10.1111/jmcb.12367
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