Bank Regulation and Lending
Friday, Jan. 6, 2017 3:15 PM – 5:15 PM
- Chair: Santiago Carbo-Valverde, Bangor University, Funcas and CUNEF
Capital Requirements, Risk Shifting and the Mortgage Market
AbstractWe 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
AbstractThis 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
AbstractWe 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.
- G2 - Financial Institutions and Services