Aggregate demand for bank capital

This paper provides a framework to transparently characterize the credit market equilibrium in an economy with rich borrower heterogeneity. We introduce the notion of borrowers' aggregate demand for bank capital, which allows us to obtain closed-form expressions for the composition and pricing of credit in general equilibrium. The framework facilitates analyses of macroprudential effects of policy interventions and long-term trends, such as changes in public market development, and sheds light on the determinants of phenomena such as overinvestment in risky assets, credit rationing, and the substitution between bank and public market finance.