Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/189927 
Year of Publication: 
2017
Series/Report no.: 
Sveriges Riksbank Working Paper Series No. 312
Publisher: 
Sveriges Riksbank, Stockholm
Abstract: 
We study banks' optimal equity buffer in general equilibrium and their response to under-capitalization. Making progress towards a "pecking order theory" for private recapitalizations, our benchmark model identifies equity issuance as individually and socially optimal, compared to deleveraging, as well as conditions that invert the individually optimal ranking. Imperfectly elastic supply of capital, incomplete insurance markets and costly bankruptcies give rise to inefficiently high leverage ex-ante, and to excessive capital shortfalls and insolvencies ex-post. Abstracting from moral hazard and informational asymmetries, we therefore provide a novel rationale for macroprudential capital regulation and new testable implications about banks' capital structure management.
Subjects: 
Bank capital
recapitalization
macroprudential regulation
incomplete markets
financial market segmentation
constrained inefficiency
JEL: 
D5
D6
G21
G28
Document Type: 
Working Paper

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