The Effect of Bank Capital Requirements on Bank Loans Rates

Wallen, Jonathan

doi:10.2139/ssrn.2954346

Cited by 8 publications

(3 citation statements)

References 17 publications

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“…In addition, given its importance, bank capital regulation has also been examined theoretically and empirically in the banking literature. On the empirical side, Wallen (2017) quantifies the impact of bank capital regulation on loan pricing. Schwert (2018) finds that bank-dependent firms tend to borrow from well-capitalized banks, while firms with access to the public bond market borrow from banks with less capital.…”

Section: Literature Reviewmentioning

confidence: 99%

Inventory financing under Risk‐Adjusted‐Return‐On‐Capital criterion

Zhang

Yang

et al. 2021

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Risk-Adjusted-Return-On-Capital (RAROC) is a loan-pricing criterion under which a bank sets the loan term such that a certain rate of return is achieved on the regulatory capital required by the Basel regulation. Some banks calculate the amount of regulatory capital for each loan under the standardized approach ("standardized banks," the regulatory capital is proportional to the loan amount), and others under the internal rating-based (IRB) approach ("IRB banks," the regulatory capital is related to the Value-at-Risk of the loan). This article examines the impact of the RAROC criterion on the bank's loan-pricing decision and the retailer's inventory decision. We find that among the loan terms that satisfy the bank's RAROC criterion, the one that benefits the retailer the most requires the bank to specify an inventory advance rate in addition to the interest rate. Under this loan term, the retailer's inventory level is more sensitive to his asset level when facing an IRB bank compared to a standardized bank. An IRB (standardized) loan leads to higher profit and inventory level for retailers with high (low) asset. For retailers with medium asset, an IRB loan results in a higher retailer profit but a lower consumer welfare. Calibrated numerical study reveals that the benefit of choosing standardized banks (relative to IRB banks) can be as high as 30% for industries with severe capital constraints, volatile demands, and low profit margins, highlighting the importance for retailers to carefully choose the type of banks to borrow from. When the interest rate is capped by regulation, retailers borrowing from a standardized bank are more likely to be influenced by the interest rate cap than those borrowing from an IRB bank. Under strong empire-building incentives (the bank will offer loan terms to maximize the size of the loan), retailers with medium initial asset level shift their preference from IRB banks to standardized banks.

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Section: Literature Reviewmentioning

confidence: 99%

Inventory financing under Risk‐Adjusted‐Return‐On‐Capital criterion

Zhang

Yang

et al. 2021

Naval Research Logistics

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“…Kisin and Manela (2016) also estimates the cost of capital requirements from a calibrated model, however they take the unique approach of studying the cost that banks paid to utilize a pre-crisis loophole which effectively reduced the risk-weight on their assets. They found the cost of capital requirements to be minimal.2Wallen (2017) similarly studies the relationship between bank capitalization and interest rates on U.S. syndicated loans.…”

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confidence: 97%

How Do Capital Requirements Affect Loan Rates? Evidence from High Volatility Commercial Real Estate*

Glancy¹,

Kurtzman²

2021

The Review of Corporate Finance Studies

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We investigate how capital requirements affect loan rates by studying the 50% increase in the risk weight for high volatility commercial real estate (HVCRE) loans under Basel III. Exploiting variation in loan terms and exposure to the period after the rule’s implementation, we find that a one-percentage-point increase in capital requirements raises loan rates by 8.5 basis points. Using a model of bank funding costs, we demonstrate the timing and scope of the HVCRE rule implies our estimate reflects the steady-state cost of capital requirements.

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“…Becker and Ivashina () compare loan and bond spreads in their analysis of aggregate quantities, but their comparison focuses on new issue yields and does not control for firm‐time unobservables. Among papers that focus on narrower issues related to loan pricing, Hubbard, Kuttner, and Palia (2002), Santos (), Lambertini and Mukherjee (2016), and Wallen () focus on bank capital; Drucker and Puri () find loan discounts associated with equity underwriting; Ivashina () focuses on lead arranger skin‐in‐the‐game; Santos and Winton (), Hale and Santos (), Schenone (), and Gustafson () study informational rents; Ivashina and Sun () and Lim, Minton, and Weisbach () focus on nonbank tranches; Dougal et al. () and Murfin and Pratt () find overweighting of information from past loans; Murfin and Petersen () study seasonality; and Botsch and Vanasco () show that banks learn about borrower quality over time.…”

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confidence: 99%

Does Borrowing from Banks Cost More than Borrowing from the Market?

Schwert

2019

The Journal of Finance

117

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This paper investigates the pricing of bank loans relative to capital market debt. The analysis uses a novel sample of loans matched with bond spreads from the same firm on the same date. After accounting for seniority, lenders earn a large premium relative to the bond‐implied credit spread. In a sample of secured term loans to noninvestment‐grade firms, the average premium is 140 to 170 bps or about half of the all‐in‐drawn spread. This is the first direct evidence of firms' willingness to pay for bank credit and raises questions about the nature of competition in the loan market.

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The Effect of Bank Capital Requirements on Bank Loans Rates

Cited by 8 publications

References 17 publications

Inventory financing under Risk‐Adjusted‐Return‐On‐Capital criterion

Inventory financing under Risk‐Adjusted‐Return‐On‐Capital criterion

How Do Capital Requirements Affect Loan Rates? Evidence from High Volatility Commercial Real Estate*

Does Borrowing from Banks Cost More than Borrowing from the Market?

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