We thank Manuel Ammann, Hendrik Hakenes, Christian Koziol, an anonymous referee, the editor John Doukas, and the seminar participants at the 2007 Annual Meeting of the European Financial Management Association, the 2007 Annual meeting of the German Finance Association, the 2008 Campus for Finance Meeting at WHU – Otto Beisheim School of Management, the 2008 Annual meeting of the AWG, and research seminar at University of St.Gallen. All remaining errors are our own. Correspondence: Jochen Lawrenz.
Deposit Finance as a Commitment Device and the Optimal Debt Structure of Commercial Banks
Article first published online: 27 JAN 2013
© 2010 Blackwell Publishing Ltd
European Financial Management
Volume 19, Issue 1, pages 14–44, January 2013
How to Cite
Bank, M. and Lawrenz, J. (2013), Deposit Finance as a Commitment Device and the Optimal Debt Structure of Commercial Banks. European Financial Management, 19: 14–44. doi: 10.1111/j.1468-036X.2012.566.x
- Issue published online: 27 JAN 2013
- Article first published online: 27 JAN 2013
- deposit financing;
- commitment device;
- bank capital structure;
- debt structure;
- contingent claims valuation
We consider a regulated bank with access to bond and insured deposit financing. Bank manager-owners have specific abilities, which allows them to extract rents. We show that deposit finance acts as a commitment device that has the potential to raise the overall debt capacity of the bank and increases pledgeable assets. Our focus is on the optimal mix of bond and deposit financing. We find that in the optimum, the bank chooses a debt structure so as to align internal incentives with external constraints. The model predicts that banks with more risky assets or with more specialised human capital use deposit financing to a lesser extent.