nep-cfn New Economics Papers
on Corporate Finance
Issue of 2011‒11‒01
two papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Quantity Rationing of Credit By George A. Waters
  2. Optimal Bank Capital By Miles, David; Yang, Jing; Marcheggiano, Gilberto

  1. By: George A. Waters (Department of Economics, Illinois State University)
    Abstract: Quantity rationing of credit, when ?firms are denied loans, has greater potential to explain macroeconomics ?fluctuations than borrowing costs. This paper develops a DSGE model with both types of financial frictions. A deterioration in credit market con?fidence leads to a temporary change in the interest rate, but a persistent change in the fraction of ?firms receiving ?financing, which leads to a persistent fall in real activity. Empirical evidence confi?rms that credit market con?fidence, measured by the survey of loan officers, is a signi?cant leading indicator for capacity utilization and output, while borrowing costs, measured by interest rate spreads, is not.
    Keywords: Quantity Rationing, Credit, VAR
    JEL: E10 E24 E44 E50
    Date: 2011–10
  2. By: Miles, David (Monetary Policy Committee Unit, Bank of England); Yang, Jing (Monetary Policy Committee Unit, Bank of England); Marcheggiano, Gilberto (Monetary Policy Committee Unit, Bank of England)
    Abstract: This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also rqeuires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs - however accurate - can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent year and also higher than targets agreed under the Basel III framework.
    Keywords: Banks; capital regulation; capital structure; cost of equity; leverage; Modigliani-Miller
    JEL: G21 G28
    Date: 2011–04–01

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