Pro-Cyclical Capital Regulation and Lending
|Keywords:||capital regulation, credit crunch;ﬁnancial crisis, pro-cyclicality|
|Abstract:||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).|
|Rights:||Copyright Behn, Haselmann, and Wachtel, July 2013.|
|Appears in Collections:||Economics Working Papers|
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