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Corporate Debt Choice and Bank Capital Regulation

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  • Haotian Xiang

    (Wharton School of the University of Pennsylvania)

Abstract

I investigate the impact of bank capital requirements in a business cycle model with corporate debt choice. Compared to non-bank investors, banks provide restructurable loans that reduce firm bankruptcy losses and enhance production efficiency. Raising capital requirements eliminates deposit insurance distortions but also deposit tax shields. As a result, firms cut back on both bank and non-bank borrowing while going bankrupt more frequently. Implementing an optimal capital ratio of 11 percent in the US produces limited marginal impacts on aggregate quantities and welfare.

Suggested Citation

  • Haotian Xiang, 2018. "Corporate Debt Choice and Bank Capital Regulation," 2018 Meeting Papers 327, Society for Economic Dynamics.
    • Handle: RePEc:red:sed018:327
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    Cited by:

    1. Fang, Xiang & Jutrsa, David & Peria, Soledad Martinez & Presbitero, Andrea F. & Ratnovski, Lev, 2022. "Bank capital requirements and lending in emerging markets: The role of bank characteristics and economic conditions," Journal of Banking & Finance, Elsevier, vol. 135(C).

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