Working Paper: CEPR ID: DP14524
Authors: Marcus Opp; Milton Harris; Christian Opp
Abstract: We propose a novel conceptual approach to transparently characterizing credit market outcomes in economies with multi-dimensional borrower heterogeneity. Based on characterizations of securities' implicit demand for bank equity capital, we obtain closed-form expressions for the composition of credit, including a sufficient statistic for the provision of bank loans, and a novel cross-sectional asset pricing relation for securities held by regulated levered institutions. Our framework sheds light on the compositional shifts in credit prior to the 07/08 financial crisis and the European debt crisis, and can provide guidance on the allocative effects of shocks affecting both banks and the cross-sectional distribution of borrowers.
Keywords: composition of credit; bank capital; nonbank competition; bailouts; credit rationing; overinvestment; crowding out; institutional asset pricing
JEL Codes: G12; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implicit demand for bank capital (G21) | pricing and composition of credit (G19) |
| borrowers' investment opportunities (G51) | demand for bank loans (G21) |
| regulatory risk classifications (G18) | demand for bank loans (G21) |
| regulatory constraints (L51) | banks' lending decisions (G21) |
| deposit subsidies (H23) | banks' lending decisions (G21) |
| shocks to bank capital (F65) | supply curve (D41) |
| supply curve (D41) | identity of the marginal borrower (G51) |
| identity of the marginal borrower (G51) | allocative efficiency (D61) |
| increases in capital requirements (G28) | demand curve for bank capital (G21) |
| demand curve for bank capital (G21) | reallocation of credit (E51) |
| regulatory policies (G18) | credit market outcomes (E44) |