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Impact of regulatory interactions on bank capital structure

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Abstract

This article examines a bank's optimal capital structure and risk-taking decisions in a regulated environment. We focus on the interactive nature of the Fed's collateralized discount window lending and the FDIC's deposit insurance. Such regulatory interactions are shown to have nonlinear and nonuniform impacts on the bank's leverage and risk-taking decisions. Thus, bank moral hazard problems may persist, even when banks are charged risk-adjusted deposit insurance premia and are also subject to market discipline through subordinate debt. Our analysis yields several new policy implications about the design and pricing of bank regulations.

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Authors and Affiliations

  1. Distinguished Professor of Finance, Edwin L. Cox School of Business, Southern Methodist University, 75275, Dallas, Texas

    Andrew H. Chen

  2. Assistant Professor of Finance, Faculty of Management, McGill University, 1001 Sherbrooke Street West, H3A 1G5, Montreal, Quebec, Canada

    Sumon C. Mazumdar

Authors
  1. Andrew H. Chen
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  2. Sumon C. Mazumdar
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Chen, A.H., Mazumdar, S.C. Impact of regulatory interactions on bank capital structure. J Finan Serv Res 8, 283–300 (1994). https://doi.org/10.1007/BF01051970

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