Abstract
We estimate the structural parameters of a quantitative banking model featuring maturity transformation, financing frictions and endogenous failures in the presence of undiversifiable background risk and regulatory constraints. Large cross-sectional balance sheet heterogeneity can be rationalized with idiosyncratic shocks and differential access to wholesale funding markets. Moreover, bank failures are strongly countercyclical and increasing in leverage. Surprisingly, tightening capital requirements results in higher bank failures, despite an increase in precautionary bank equity. The tighter capital ratio generates an endogenous fall in the expected return on equity. As a result, average equity rises proportionately less than the capital ratio requirement, making bank failure more likely. JEL Classification: E32, E44, G21
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