Bank Concentration, Bank Capital and Misallocation

During the last thirty years, U.S. bank concentration has been growing over time, as has bank capital ratio, which has been rising and already well above the minimum capital requirement. To explain these findings, I develop a tractable dynamic model with two key elements: financial constrained entrepreneurs who are heterogeneous in productivity and initial wealth, as well as a banking sector with imperfect competition. Consistent with the data, the model implies that bank concentration leads to an increase in bank capital and a possibly non-binding capital constraint. Further, I use the model to understand how bank concentration affects misallocation through the interaction between bank concentration and bank capital when the financial market is incomplete, which I refer to as the ”bank capital channel”. This channel suggests that banks are over accumulating equity capital in terms of allocative efficiency, based on which I discuss implications of bank regulations