Bank Capital Regulation and Incentives for Risk-Taking

Milne, Alistair; Whalley, A. Elizabeth

doi:10.2139/ssrn.299319

Cited by 81 publications

(104 citation statements)

References 53 publications

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“…In Albertazzi and Gambacorta (2009), the nominal value of the net interest margin is expected to increase by almost 4% in the long run if the long-term interest rate rises by 1 percentage point. In addition, Milne and Whalley (2001) argued that the lending behavior of banks can be affected by banks' profitability levels because banks with high profitability have a sufficient financial buffer to meet the minimum capital requirement resulting in an increasing supply of credit. Stolz and Wedow (2011) also reported that banks' profitability may affect the lending behavior of banks via changing the level of capital buffer in the banks.…”

Section: Control Variablesmentioning

confidence: 99%

Are bank loans to SMEs procyclical? Evidence from an analysis of the lending behavior of Korean banks

Seo

2013

SAJBM

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This paper investigates the procyclicality of bank loans to Small and Medium Enterprises (SMEs) and to Large Enterprises (LEs) using aggregated and cross-sectional data from major private, foreign, and state-owned banks in Korea in the period from 1999 to 2008. Based on previous studies, it is hypothesized that compared to LEs, banks loans to SMEs may be more vulnerable to external economic shock. Berger and Udell (1994) suggested that bank loans to SMEs are comparatively risky due to their relatively low collateral and heavy dependence on banks for raising funds. In this study, empirical tests are verified by applying the rolling vector error correction Model (VECM), panel generalized least squares model (GLS), and the Clustering Fixed Effect Model. Findings include robust support for the procyclicality of bank loan to SMEs, but not for LEs. The review of short-term dynamics among first differential variables such as loans and GDP provides evidence to support a related hypotheses: the profit-oriented motivation of commercial banks in enhancing relationships with SMEs, the characteristics of governance structure in three types of banks (private, state-owned, and foreign owned banks), and the large-bank barriers assumption.

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Section: Control Variablesmentioning

confidence: 99%

Are bank loans to SMEs procyclical? Evidence from an analysis of the lending behavior of Korean banks

Seo

2013

SAJBM

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“…Turning to theoretical analysis, Milne and Whalley (2001) show that in their continuous-time setting with random regulatory audits of capital levels and xed ex-post penalties banks hold a buer of free capital above the regulatory minimum. Estrella (2004) considers a bank's optimal capital choice in a model with capital regulation, where capital and dividend payments adjustment costs are present, but he focuses on the pro-cyclical character of capital regulations.…”

Section: Literature Backgroudmentioning

confidence: 99%

“…Still, despite empirical evidence, most of the economic literature assumes zero excess capital buers. Positive buers, if introduced, are obtained via capital adjustment costs (Estrella (2004)), xed ex-post nes for not meeting capital requirements (Milne (2002)) or random audits by regulators (Milne and Whalley (2001)). However, while yielding positive excess capital levels, these solutions are mechanical and lack realism in resembling true regulatory procedures used in case of a requirements' violation.…”

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confidence: 99%

“…Section 2 describes the proposed bank's optimization problem; Section The outburst of the recent nancial crisis has provoked a discussion on macroprudential policies that would prevent the nancial system from similar breakdowns in the future. Galati Turning to theoretical analysis, Milne and Whalley (2001) show that in their continuous-time setting with random regulatory audits of capital levels and xed ex-post penalties banks hold a buer of free capital above the regulatory minimum. Estrella (2004) considers a bank's optimal capital choice in a model with capital regulation, where capital and dividend payments adjustment costs are present, but he focuses on the pro-cyclical character of capital regulations.…”

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confidence: 99%

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Financial Frictions and the Credit Transmission Channel: Capital Requirements and Bank Capital

Gornicka,

van Wijnbergen

2013

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The recent global nancial crisis, which is already being compared in magnitude and possible long-term consequences to the Great Depression, has exposed the weaknesses of nancial markets as well as their regulatory framework. In particular, it has become clear that minimum capital requirements in their current form are not sucient to keep banks from increased risk-taking and, as safety buers, to protect banks from default. The loss absorption capacity of the banking system is by now widely considered to be too low. Terms of use: Documents in EconStor mayIn addition, capital regulations may have even contributed to the severity of the recent crisis: it is widely accepted that capital requirements are pro-cyclical (Bec and Gollier (2009)), and thus amplify business cycle uctuations (Blum and Hellwig (1995), Kashyap and Stein (2004) and Heid (2007)). In the light of above considerations a major overhaul of the system of capital requirements and more generally of the structure 1 of bank regulation has been agreed upon and is to be implemented over the coming years (Basel Committee (2010)). Under Basel-III capital requirements will be tightened in various ways and a rst step has been made to create a less pro-cyclical regulatory framework. At the same time the plans to implement this new system have triggered a wide set of questions: will tightening requirements turn out to be an impediment for economic growth in the long term? Will it delay recovery in the short term? Will it reduce or even eliminate pro-cyclicality of the system? What will in fact be the impact on actual capital ratios? Will banks respond by increasing their capital or will they just absorb the new rules by lowering already existing buers they hold in excess of current regulatory ratios?While answers to most of these questions will require a general equilibrium framework, any general equilibrium eects will be triggered by changes in the banks' actual capital levels. In this paper we focus entirely on this issue, i.e. we investigate the direct impact of minimum requirements on banks' capital choices, before general equilibrium eects come into play. We believe that a precise analysis of the actual capital's dynamics in presence of capital regulations is a necessary rst step towards further welfare analysis and policy implications. For example, if in equilibrium banks' actual capital responds more than one-to-one to a raise in minimum requirements, the pro-cyclical character of capital regulatio...

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“…Then we extend the analysis 2 This strand of literature posits that banks treat their capital holding strategy as an inventory decision that allows them to be forward-looking by increasing their capital levels as necessary or adjusting their asset portfolios in response to any future breach of regulatory capital requirements. The buffer stock model of bank capital was first proposed by Baglioni and Cherubini (1994), later developed by Milne and Robertson (1996), Milne and Whalley (2001), Milne (2004), and in discrete time by Calem and Rob (1996). Peura and Keppo (2006) extend the continuous-time framework to take account of delays in raising capital.…”

Section: Introductionmentioning

confidence: 99%