Capital Regulation and Bank Deposits. (13th June 2018)

• Record Type: Journal Article
• Authors: Arping, Stefan
• Is Part Of: Review of finance. Volume 23:Number 4(2019)
• Page Start: 831
• Page End: 853
• Publication Date: 2018-06-13
• Subjects: Bank capital structure -- Capital adequacy regulation -- Debt overhang; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfy019
• Languages: English
• ISSNs: 1572-3097

Abstract

Abstract: Recent literature suggests that higher capital requirements for banks might lead to a socially costly crowding out of deposits by equity. This paper shows that additional equity in banks can help to crowd in deposits. Intuitively, as banks have more equity and become safer, the cost of deposit funding may decline; this, in turn, can encourage banks to expand their deposits. However, I also find that, for this effect to occur, capital requirements may have to be stringent enough: When bank capital is low, a small rise in capital requirements can cause banks to substitute equity for deposits. Overall, a non-monotonic relationship between the required amount of equity in banks and their level of deposit funding obtains.