Bank capital regulation, loan contracts, and corporate investment

Diemo Dietrich; Achim Hauck

doi:10.1016/j.qref.2013.10.005

Bank capital regulation, loan contracts, and corporate investment

Diemo Dietrich, Achim Hauck

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Abstract

This paper studies the link between bank capital regulation, bank loan contracts and the allocation of corporate resources across firms’ different business lines. Credit risk is lower when firms write contracts that oblige them to invest mainly into projects with highly tangible assets. We argue that firms have an incentive to choose a contract with overly safe and thus inefficient investments when intermediation costs are increasing in banks’ capital-to-asset ratio. Imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs.

Original language	English
Pages (from-to)	230-241
Journal	Quarterly Review of Economics and Finance
Volume	54
Issue number	2
Early online date	16 Oct 2013
DOIs	https://doi.org/10.1016/j.qref.2013.10.005
Publication status	Published - May 2014

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This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 10 Reduced Inequalities

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10.1016/j.qref.2013.10.005

HAUCK_2013_pre_QREF_Bank_capital_regulation,_loan_contracts,_and_corporate_investment.pdf
NOTICE: this is the author’s version of a work that was accepted for publication in 'Quarterly review of economics and finance'. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in 'Quarterly review of economics and finance', 54, 2, May 2014 DOI:10.1016/j.qref.2013.10.005
Accepted author manuscript (Post-print), 472 KBLicence: CC BY-SA

Cite this

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title = "Bank capital regulation, loan contracts, and corporate investment",

abstract = "This paper studies the link between bank capital regulation, bank loan contracts and the allocation of corporate resources across firms{\textquoteright} different business lines. Credit risk is lower when firms write contracts that oblige them to invest mainly into projects with highly tangible assets. We argue that firms have an incentive to choose a contract with overly safe and thus inefficient investments when intermediation costs are increasing in banks{\textquoteright} capital-to-asset ratio. Imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs.",

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Bank capital regulation, loan contracts, and corporate investment

Abstract

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