New Evidence on Procyclical Bank Capital Regulation: The Role of Bank Loan Commitments

40 Pages Posted: 10 Nov 2011 Last revised: 5 Oct 2018

Date Written: September 15, 2018

Abstract

Previous research on procyclical bank capital regulation has largely focused on the role of increased loan losses and deteriorated credit ratings in economic downturns. We focus on the role of bank loan commitments, which have been increasingly popular from the 2000s, on the procyclicality of bank capital regulation. Using the bank-level data of U.S. commercial banks, we present another independent source of procyclicality working through bank loan commitments, which we call "loan commitments channel." We find that, as firms draw down more from their pre-existing credit lines when credit market conditions are tighter, this increased takedown raises bank risk-weighted assets via involuntary lending and thus lowers capital adequacy ratios of commercial banks, making them more procyclical. Our empirical results suggest that this loan commitments channel is quantitatively important and needs to be addressed in designing the regulatory framework for reducing credit procyclicality.

Keywords: bank loan commitments, capital adequacy ratio (CAR), procyclical bank capital regulation

JEL Classification: E44, G21, G32

Suggested Citation

Park, Ki Young, New Evidence on Procyclical Bank Capital Regulation: The Role of Bank Loan Commitments (September 15, 2018). Available at SSRN: https://ssrn.com/abstract=1957496 or http://dx.doi.org/10.2139/ssrn.1957496

Ki Young Park (Contact Author)

Yonsei University ( email )

Yonsei University
Seoul
Korea, Republic of (South Korea)

Register to save articles to
your library

Register

Paper statistics

Downloads
127
Abstract Views
762
rank
223,373
PlumX Metrics