TY  - JOUR
AU  - Gorton,Gary
AU  - Winton,Andrew
TI  - Bank Capital Regulation in General Equilibrium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5244
PY  - 1995
Y2  - August 1995
UR  - http://www.nber.org/papers/w5244
L1  - http://www.nber.org/papers/w5244.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Andrew Winton
Carlson School of Management
Finance Department
University of Minnesota
3-275 CarlS Mgmt
321 19th Avenue S
Minneapolis, MN 55455
Tel: 612/624-0589
Fax: 612/626-1335
E-Mail: awinton@csom.umn.edu
AB  - We study whether the socially optimal level of stability of the banking system can be implemented with regulatory capital requirements in a multi-period general equilibrium model of banking.  We show that: (i) bank capital is costly because of the unique liquidity services provided by demand deposits, so a bank regulator may optimally choose to have a risky banking system; (ii) even if the regulator prefers more capital in the system, the regulator is constrained by the private cost of bank capital, which determines whether bank shareholders will agree to meet capital requirements rather than exit the industry.
ER  -