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Liquidity Provision, Bank Capital, and the Macroeconomy
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Liquidity Provision, Bank Capital, and the Macroeconomy
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Liquidity Provision, Bank Capital, and the Macroeconomy
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Journal Article
Liquidity Provision, Bank Capital, and the Macroeconomy
2017
Overview
New bank equity must come from somewhere. In general equilibrium, raising bank capital requirements means either that banks produce less shortterm 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).
