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This paper examines the role of bank capital in decision-making by bank holding companies (BHCs) in the United States. Following call option approach to bank capital, BHCs optimally choose the amount of capital to insure the bank against becoming capital constrained in the future. We provide empirical support for this model, and find that a higher optimal level of capital leads to higher loan rates. Furthermore, higher loan rates result in lower amounts of lending. Thus, an increase in capital requirements is likely to lead to higher loan rates and a significant reduction in lending.

This article estimates a panel model for U.S. money demand using annual statelevel data for the period from 1977 to 2008. We incorporate housing wealth in the demand-for-money function and find strong evidence of a relationship between a broad monetary aggregate and housing wealth. This finding is robust to the inclusion of variables measuring financial heterogeneity across U.S. regions. Breaking up the sample in two subperiods shows that panel estimates including housing wealth yield more stable coefficients than both time-series estimates and panel estimates excluding housing wealth. We also show that the link between money and housing wealth predates the recent boom-and-bust cycle. (JEL E41, E52)