Banks operating under Value-at-Risk constraints give rise to a welldefined
aggregate balance sheet capacity for the banking sector as
a whole that depends on total bank capital. Equilibrium risk and
market risk premiums can be solved in closed form as functions of
aggregate bank capital. We explore the empirical properties of the
model in light of recent experience in the financial crisis and highlight
the importance of balance sheet capacity as the driver of the financial
cycle and market risk premiums.