More Equity, Fewer Deposits? The Elusive Effect of Capital Requirements on Bank Debt

Prior literature suggests that higher equity capital requirements for banks might lead to a socially costly reduction in deposits and other liquid bank liabilities. This paper presents a model of bank capital structure in which the effect of more-stringent capital requirements on the supply of deposits can be non-monotonic. A small rise in capital requirements from low levels can, in some cases, inefficiently crowd out deposits. However, a more...