Working Paper: NBER ID: w27858
Authors: Milton Harris; Christian Opp; Marcus 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: bank capital; credit market; borrower heterogeneity; regulatory constraints; financial stability
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 price of bank capital (G21) | lending decisions (G21) |
| borrower characteristics (G51) | credit access (G21) |
| regulatory capital requirements (G28) | credit rationing among marginal borrowers (G21) |
| policy changes in capital requirements (G28) | composition of bank credit (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) |