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Liquidity Provision, Bank Capital, and the Macroeconomy
Author(s) -
GORTON GARY,
WINTON ANDREW
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12367
Subject(s) - financial system , business , shareholder , market liquidity , debt , capital requirement , monetary economics , bank rate , equity (law) , bank failure , capital adequacy ratio , finance , economics , central bank , monetary policy , corporate governance , market economy , incentive , political science , law
New bank equity must come from somewhere. In general equilibrium, raising bank capital requirements means either that banks produce less short‐term debt (as debt holders must become shareholders), or short‐term debt is not reduced and the banking system acquires nonbank equity (as the shareholders in nonbanks become shareholders in banks). The welfare effects involve a trade‐off because bank debt is special as it is used for transactions purposes, but more bank capital can reduce the chance of bank failure (producing welfare losses).