Bank's capital structure under non-diversifiable risk

DOI10.1007/S001990100195MaRDI QIDQ1865201zbMATH OpenOpenAlexFDO

Authors Masaya Sakuragawa

Publication date 25 March 2003

Published in Economic Theory (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s001990100195

zbMATH Keywords

asymmetric informationcapital structurefinancial intermediation

Mathematics Subject Classification ID

Stochastic models in economics (91B70)

Review text

The aim of this paper is to study the design of optimal capital structure of a ``large intermediary when there is a non-diversifiable risk. It is assumed that the cost of verifying an intermediary is constant, irrespective of the bank size. The author demonstrates that under some conditions a ``large intermediary realizes more efficient allocation by issuing both debt and equity than by issuing only debt. The set of optimal contracts involves ex ante monitoring made by shareholders of the intermediary. It is proved that the changes in parameters, such as the variance of the aggregate risk or the cost of monitoring, affect bankruptcy costs and the capital structure. A two-period model is considered. In period \(0\) agents write contracts, and in period \(1\) consumption takes place. Mathematically, the problem is rdeuced to a two-sided optimization procedure in a stochastic environment. Possible extensions are described.

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(5)

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• Optimal capital structures for private firms
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• Risk‐based Decisions on the Asset Structure of a Bank under Partial Economic Information
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