Intermediary Capital and the Credit Market.

This article develops a tractable equilibrium framework to analyze the role of regulated financial intermediaries' capital in the allocation and pricing of credit across heterogeneous borrowers. It introduces a sufficient statistic—the total return on intermediary capital—that governs intermediaries' lending decisions and derives a novel intermediary asset pricing equation accounting for endogenous segmentation of marginal investors across securities. The model highlights how intermediaries' shadow cost of capital and implicit government subsidies (the "put value") influence credit composition, pricing distortions, and risk-taking incentives, explaining empirical phenomena such as reaching-for-yield behavior, rating effects on loan yields, concentrated portfolios, and substitution between bank and public market financing. Additionally, the framework provides insights into the compositional effects of regulatory policies like capital ratio requirements and the impact of shocks to intermediary capital, emphasizing the interplay between borrower heterogeneity, regulatory constraints, and market structure in shaping credit markets.