search query: @author Rajan, R. G. / total: 7
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| Author: | Diamond, D. W. Rajan, R. G. |
| Title: | A theory of bank capital |
| Journal: | Journal of Finance
2000 : DEC, VOL. 55:6, p. 2431-2465 |
| Index terms: | Economic theory Banks Capital theory |
| Language: | eng |
| Abstract: | Banks can create liquidity precisily because deposits are fragile and prone to runs. Increased uncertainty makes deposits excessively fragile, creating a role for outside bank capital. Greater bank capiytal reduces the probability of financial distress but also reduces liquidity creation. The quatity of capital influences the amount that banks can induce borrowers to pay. Optimal bank capital structure trades off effects on liquidity creation, costs of bank distress, and the ability to force borrower repayment. The model explains the decline in bank capital over the last two centuries. It identifies overlooked consequences of regulatory capital requirements and deposit insurance. |
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