Pro-Cyclical Capital Regulation and Lending

42 Pages Posted: 3 Aug 2013 Last revised: 16 Apr 2015

See all articles by Markus Behn

Markus Behn

European Central Bank (ECB)

Rainer F. H. Haselmann

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Paul Wachtel

New York University - Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2015

Abstract

We use a quasi-experimental research design to examine the effect of model-based capital regulation on the pro-cyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model-based regulation increased by 0.5 percentage points. As a consequence, banks reduced these loans by 2.1 to 3.9 percentage points more than loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that micro-prudential capital regulation can have sizeable real effects.

Keywords: capital regulation, credit crunch, financial crisis, pro-cyclicality

JEL Classification: G01, G21, G28

Suggested Citation

Behn, Markus and Haselmann, Rainer F. H. and Haselmann, Rainer F. H. and Wachtel, Paul, Pro-Cyclical Capital Regulation and Lending (March 1, 2015). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2305514 or http://dx.doi.org/10.2139/ssrn.2305514

Markus Behn (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Rainer F. H. Haselmann

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Paul Wachtel

New York University - Stern School of Business ( email )

44 West 4th St.
New York, NY 10012
United States
212-998-4030 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~pwachtel

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