The Real Effects of Bank Capital Requirements

Fraisse, Henri; Lé, Mathias; Thesmar, David

doi:10.2139/ssrn.2289787

Cited by 34 publications

(22 citation statements)

References 6 publications

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“…To formalize the analysis, we collapse quarterly bank-level loans into single pre-event and post-event time periods by taking the average of the two years before and the two years after the reform, and regress the change in this variable on a dummy that indicates whether the bank has introduced the model-based approach. Table 11, column 1, shows that IRB banks increased their lending by about 9 percent as compared with SA banks (see Brun et al 2013 for similar evidence). In column 2 we add several bank-level control variables (i.e., the pre-event logarithm of assets, ratio of equity to assets, ROA and bank ownership dummies) and find that the coefficient for the IRB bank dummy remains significantly positive.…”

Section: Model-based Regulation and Lendingmentioning

confidence: 75%

“…12 The introduction of risk-weighted capital charges and the potential problems related to them have been discussed in several papers, e.g. Brinkmann and Horvitz (1995), Jones (2000), Daníelsson et al (2001), Kashyap and Stein (2004), Hellwig (2010), Brun et al (2013), and Behn et al (2014). For an assessment from the side of the regulator see Basel Committee on Banking Supervision (1999).…”

Section: The Introduction Of Model-based Regulation In Germanymentioning

confidence: 99%

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The Limits of Model-Based Regulation

2014

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In this paper, we investigate how the introduction of complex, model-based capital regulation affected credit risk of financial institutions. Model-based regulation was meant to enhance the stability of the financial sector by making capital charges more sensitive to risk. Exploiting the staggered introduction of the model-based approach in Germany and the richness of our loan-level data set, we show that (1) internal risk estimates employed for regulatory purposes systematically underpredict actual default rates by 0.5 to 1 percentage points; (2) both default rates and loss rates are higher for loans that were originated under the model-based approach, while corresponding risk-weights are significantly lower; and (3) interest rates are higher for loans originated under the model-based approach, suggesting that banks were aware of the higher risk associated with these loans and priced them accordingly. Further, we document that large banks benefited from the reform as they experienced a reduction in capital charges and consequently expanded their lending at the expense of smaller banks that did not introduce the model-based approach. Counter to the stated objectives, the introduction of complex regulation adversely affected the credit risk of financial institutions. Overall, our results highlight the pitfalls of complex regulation and suggest that simpler rules may increase the efficacy of financial regulation.

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Section: Model-based Regulation and Lendingmentioning

confidence: 75%

Section: The Introduction Of Model-based Regulation In Germanymentioning

confidence: 99%

The Limits of Model-Based Regulation

2014

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“…Our findings contribute to the literature on the relationship between bank capital regulation and lending. While previous papers in this area study the impact of changes in capital requirements imposed by the regulator (e.g., Peek and Rosengren (1995), Thakor (1996), Gambacorta and Mistrulli (2004), Brun, Fraisse, and Thesmar (2013), Aiyar, Calomiris, and Wiedalek (2014), and Jiménez et al (2014b)), our paper examines how an inherent feature of the regulation itself leads to changes in capital requirements and corresponding adjustments in lending. This difference is important, since regulators have certain objectives when they adjust capital charges, while the adjustments in our setup are driven by an exogenous credit risk shock.…”

mentioning

confidence: 99%

Procyclical Capital Regulation and Lending

Behn¹,

Haselmann²,

Wachtel

2016

The Journal of Finance

213

132

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We combine particular institutional features of the stepwise introduction of asset risk-specific capital charges by German banks with the event of the Lehman shock to test the theory of pro-cyclicality of capital regulation and to quantify the magnitude of this regulation on firms' access to lending. The Lehman shock resulted in an increase of credit risk during the implementation period of the internal ratings-based (IRB) approach to capital regulation. At this point, banks introducing IRB had transferred only a portion of their loan portfolios to the new approach. Exploiting the variation of the regulatory approach within IRB banks and the fact that many firms borrow from several IRB banks at the same time allows us to systematically control for both bank-level and firm-level heterogeneity. Loans to the same firm decline by about 3.5 percent more when the loan is part of an IRB portfolio as compared with a portfolio using the traditional regulatory approach. Since banks tend to reduce especially large IRB credit exposures during the recession, firms relying on IRB loans experience an even stronger reduction in aggregate borrowing (5 to 10 percent larger) as compared with firms relying on loans under the traditional approach. Our findings have important implications for the design of capital regulation (i.e., Basel III).

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“…Much of the related literature study periods of economic downturns (see, e.g.,Peek and Rosengren, 1997;Brun, Fraisse, and Thesmar, 2013).8 SeeGertler and Kiyotaki (2010) andBrunnermeier, Eisenbach, and Sannikov (2013) for recent surveys.…”

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confidence: 99%

The Shadow Cost of Bank Capital Requirements

Kisin

Manela

2016

Rev. Financ. Stud.

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How much would an increase in regulatory capital requirements cost banks? We estimate the shadow cost of capital requirements for banks using data on their participation in a costly regulatory loophole. The extent to which banks bypassed capital requirements, by providing liquidity guarantees to asset-backed commercial paper conduits, reveals their private compliance costs. We estimate that a ten percentage point increase in capital requirements would cost $2.2 billion a year for all banks that exploited the loophole combined, and no more than $3.7 billion for all US banks. The average cost per bank is $143 million, or 4 percent of annual profits. Lending interest rates would increase by 3 basis points and quantities would decrease by 1.5 percent.

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The Real Effects of Bank Capital Requirements

Cited by 34 publications

References 6 publications

The Limits of Model-Based Regulation

The Limits of Model-Based Regulation

Procyclical Capital Regulation and Lending

The Shadow Cost of Bank Capital Requirements

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