Bank capital structure and credit decisions

This paper argues that banks must be sufficiently levered to have first-best incentives to make new risky loans. This result, which is at odds with the notion that leverage invariably leads to excessive risk taking, deri
This paper argues that banks must be sufficiently levered to have first-best incentives to make new risky loans. This result, which is at odds with the notion that leverage invariably leads to excessive risk taking, derives from two key premises that focus squarely on the role of banks as informed lenders. First, banks finance projects that they do not own, which implies that they cannot extract all the profits. Second, banks conduct a credit risk analysis before making new loans. Our model may help understand why banks take on additional unsecured debt, such as unsecured deposits and subordinated loans, over and above their existing deposit base. It may also help understand why banks and finance companies have similar leverage ratios, even though the latter are not deposit takers and hence not subject to the same regulatory capital requirements as banks. JEL classification: G21; G32
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Metadaten
Author:Roman Inderst, Holger Müller
URN:urn:nbn:de:hebis:30-72919
Series (Serial Number):Working Paper Series : Institute for Monetary and Financial Stability (31)
Document Type:Working Paper
Language:English
Date of Publication (online):2009/12/08
Year of first Publication:2009
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2009/12/08
HeBIS PPN:22036625X
Institutes: Institute for Monetary and Financial Stability (IMFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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