NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Financing as a Supply Chain: The Capital Structure of Banks and Borrowers

William Gornall, Ilya A. Strebulaev

NBER Working Paper No. 19633
Issued in November 2013
NBER Program(s):   AP   CF

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.

download in pdf format
   (444 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19633

Users who downloaded this paper also downloaded* these:
Acharya, Le, and Shin w19707 Bank Capital and Dividend Externalities
Justiniano, Primiceri, and Tambalotti w19635 The Effects of the Saving and Banking Glut on the U.S. Economy
Graham, Leary, and Roberts w19910 A Century of Capital Structure: The Leveraging of Corporate America
DeAngelo and Stulz w19139 Why High Leverage is Optimal for Banks
Baker and Wurgler w19018 Do Strict Capital Requirements Raise the Cost of Capital? Banking Regulation and the Low Risk Anomaly
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us