Bank capital regulation seems to be today's most accepted regulatory instrument. The reasoning is that limited liability and deposit insurance appear to give banks incentives for excessive risk-taking. Capital requirements can alleviate this problem as banks are obliged to hold more capital...

We study price linkages between assets held by financial institutions that maintain fixed capital structures over time. We consider a market consisting of a banking and nonbanking sector. Firms in the banking sector actively manage their leverage ratios to conform with pre-specified target...