We develop a dynamic structural model of bank behaviour that provides a microeconomic foundation for bank capital and …

imperfectly elastic supply of bank equity stemming from financial market segmentation. In our model, equity is costly and serves … and the design of bank stress testing. …

empirical support. We conclude that bank equity is not socially expensive, and that high leverage at the levels allowed, for …

regulatory requirements. Our analytic characterization of the bank policy choices shows that imposing solely liquidity … requirements leads to lower bank losses in default at the cost of an increased likelihood of default. Combining liquidity … requirements with leverage requirements reduces drastically both the likelihood of default and the magnitude of bank losses in …