Financing as a Supply Chain: The Capital Structure of Banks and Borrowers / William Gornall, Ilya A. Strebulaev.

Format:

Book

Author/Creator:

Gornall, William.

Contributor:

National Bureau of Economic Research.

Strebulaev, Ilya A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19633.

NBER working paper series no. w19633

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Financing as a Supply Chain

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

We develop a model of the joint capital structure decisions of banks and their borrowers. Strikingly high bank leverage emerges naturally from the interplay between two sets of forces. First, seniority and diversification reduce bank asset volatility by an order of magnitude relative to that of their borrowers. Second, previously unstudied supply chain effects mean that highly levered financial intermediaries are the most efficient. Low asset volatility enables banks to safely take on high leverage; supply chain effects compel them to do so. Firms with low leverage also arise naturally as borrowers internalize the systematic risk costs they impose on their lenders. Because risk assessment techniques from the Basel II framework underlie our structural model, we can quantify the impact capital regulation and other government interventions have on bank leverage, firm leverage, and fragility. Deposit insurance and the expectation of government bailouts lead not only to risk taking by banks, but increased risk taking by firms. Capital regulation lowers bank leverage but can lead to compensating increases in the leverage of firms, as well as a small increase in borrowing costs.

Notes:

Print version record

November 2013.