Abstract
We study how optimal bank capital and bond risk are inuenced by deposit insurance, implicit guarantees, depositor preference, asset encumbrance, and bail-in resolution frameworks. We nd that these features of bank nancing change the optimal amount of bank capital. The net eect on bond debt risk and valuation is small, while the eects on shareholder value and public sector liability value are significant. A gap between optimal capital and required capital represents a cost to shareholders and increases the risk of regulatory arbitrage. Based on a small sample of European banks, we nd support for the
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