Footnote:
In: Journal of Finance, Forthcoming
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments February 14, 2020 erstellt
Description:
Government guarantees generate an implicit subsidy for banks. A capital requirement reduces this subsidy, through a simple liability composition effect. However, the guarantees also make a bank undervalue loans that generates surplus in the states of the world where it defaults. Raising the capital requirement makes the bank safer, which alleviates this problem. We dub this mechanism, which we argue is empirically relevant, the forced safety effect