Bank Regulation and Lending

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Missouri
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Santiago Carbo-Valverde, Bangor University, Funcas and CUNEF

The Effects of Bank Capital Requirements on Bank Lending: What Can We Learn from the Post-crisis Regulatory Reforms

Jose Berrospide
,
Federal Reserve Board
Rochelle Edge
,
Federal Reserve Board

Abstract

We use events associated with the implementation of a number of U.S. post-crisis capital reforms to consider the impact of bank capital requirements on bank lending. We conduct our analysis separately for small bank holding companies (BHCs) – that is, BHCs with less than $50 billion but greater than $0.5 billion in total assets, for which Basel III represents the main post-crisis change in the capital regime – and for large BHCs – that is, BHCs with more than $50 billion in total assets that are subject to additional post-crisis reforms. In both cases we use the arrival of new information on capital requirements – which affected different BHCs by differential magnitudes – to estimate these impacts. The new information on capital requirements that we use varies between our small and large BHC analysis and our empirical strategies also differ. For small BHCs we rely on new information contained in the announcement of the U.S. banking agencies’ proposed Basel III capital rules of June 2012 and final Basel III capital rules of July 2013 and, in particular, on changes in regulatory capital ratios implied by differences in how these rules set various assets’ risk weights and define qualifying regulatory tier 1 capital. For small BHCs we conduct our analysis using BHC-level data for various categories of loans. For large BHCs we rely on the information contained in the first public release of the CCAR stress-test results in March 2012. We find negative but relatively small effects of increases in regulatory capital requirements on lending for small U.S. BHCs but larger effects for large BHCs for which, due to our use of a BHC-firm matched sample, we are able to control better for loan demand influences. For small banks we consider separately the impact of changes in regulatory capital requirement associated with both the announcement of Basel III proposed and final rules and find different sized effects, with the effects for the final rules being notably smaller.

Capital Requirements, Risk Shifting and the Mortgage Market

Arzu Uluc
,
Bank of England
Tomasz Wieladek
,
Barclays and CEPR

Abstract

We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level data set containing all mortgages issued in the United Kingdom between 2005 Q2 and 2007 Q2. We find that a rise of a 100 basis points in capital requirements leads to a 5.4% decline in individual loan size by bank. Loans issued by competing banks rise by roughly the same amount, which is indicative of credit substitution. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with origination of riskier loans to grow capital by raising retained earnings. No evidence for credit substitution of non-bank finance companies is found.

Is Bank Capital Regulation Costly for Firms? – Evidence from Syndicated Loans

Luisa Lambertini
,
Swiss Federal Institute of Technology-Lausanne
Abhik Mukherjee
,
Swiss Federal Institute of Technology-Lausanne

Abstract

This paper estimates the impact of bank capital regulation on lending spreads. We use firm-level data on large syndicated loans matched with Bank Holding Company (BHC) data for the lending banks in our panel regressions. We find that higher bank capital leads to an increase in the loan pricing. Further, we investigate if stress test failure under the Supervisory Capital Assessment Program and Comprehensive Capital Analysis and Review leads to higher loan spreads, since financial institutions that failed were required to raise capital in the short run. Using difference-in-difference framework, we find: 1) BHCs that failed the stress tests increased their loan pricing; 2) Loan pricing is higher for all banks after the commencement of the stress tests. These findings suggest that greater regulatory oversight and higher capital requirements have made syndicated loans more costly for firms.

Taxation, Ownership and Agency Costs at Depository Institutions

Robert DeYoung
,
University of Kansas
John Goddard
,
Bangor University
Donal G. McKillop
,
Queen's University Belfast
John O.S. Wilson
,
University of St. Andrews

Abstract

We exploit natural differences in tax status and organizational form at US depository institutions to test whether and how cash flow constraints (mandatory dividend pay-outs that allow Subchapter S banks to avoid double taxation) and weak governance incentives (mutual ownership of credit unions) impact firm-level financial efficiency. We estimate a profit efficiency model using quarterly data on 1,650 US depositories between 2005 through 2014, and then use the model to evaluate the relative performance of 302 matched pairs of commercial banks and Subchapter S banks and 469 matched pairs of commercial banks and credit unions. The evidence is consistent with our priors that cash flow constraints incentivize efficient Subchapter S management (manifested mainly by economizing on costly deposit funding). The evidence is also consistent with our priors that mutual ownership result is lax oversight of credit union management (manifested predominantly in overuse of costly labor inputs and deposit funding). Our tests indicate that the credit union tax subsidy is largely consumed by paying above-market interest rates to depositor-members and by employing unnecessary credit union employees.
Discussant(s)
Klaas Mulier
,
Ghent University
Fergal McCann
,
Central Bank of Ireland
Steven Ongena
,
University of Zurich
David C. Wheelock
,
Federal Reserve Bank of St. Louis
JEL Classifications
  • G2 - Financial Institutions and Services