Accounting and Finance Seminar - Sonny Biswas (University of Bristol)

13 November 2019, 1.00 PM - 13 November 2019, 2.15 PM

Sonny Biswas

G.15, 15-19 Tyndalls Park Road

Bank capital structure and regulation under adverse selection: An optimal contracting framework

In a model with heterogeneously skilled agents we show that, i. skilled agents hold capital and the unskilled deposit, ii. bank capital is costly since the skilled have a higher outside option and iii. in presence of adverse selection, banks use deposit rates to signal type; lifting deposit rate ceilings may lead to consolidation in the banking sector, as is observed empirically. The skilled banker may divert some output; offering a deposit contract to the unskilled and becoming the residual claimant relaxes the constraint, allowing bank formation. In the presence of adverse selection, both a capital requirement and a floor on the deposit rate may achieve constrained efficiency, but the deposit floor is the superior tool.

 

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