Banks’ leverage choices represent a delicate balancing act. Credit discipline argues for more leverage, while balance …, but also create perverse incentives for banks to engage in correlated asset choices and to hold little equity capital. As … a way to cope with these distorted incentives, we outline a two-tier capital framework for banks. The first tier is a …

We address two questions: (i) Are bank capital structure and value correlated in the cross section, and if so, how? (ii …) If bank capital does affect bank value, how are the components of bank value affected by capital? We first develop a … dynamic model with a dissipative cost of bank capital that is traded off against the benefits of capital: strengthened …

substitutable assets, like cash and trading assets. Fixed assets, like premises, reduce disagreement. Capital also reduces …

operate via increases in credit risk and the externality imposed by risky borrowers on safe ones. Finally, we provide new …