Bank Capital Regulation, Loan Contracts, and Corporate Investment

Posted: 10 Nov 2013 Last revised: 9 May 2014

See all articles by Diemo Dietrich

Diemo Dietrich

Newcastle University Business School

Achim Hauck

University of Portsmouth

Date Written: October 5, 2013

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.

Keywords: Financial contracting, Corporate investment, Asset tangibility, Bank capital regulation

JEL Classification: G21, G28, G31

Suggested Citation

Dietrich, Diemo and Hauck, Achim, Bank Capital Regulation, Loan Contracts, and Corporate Investment (October 5, 2013). Quarterly Review of Economics and Finance 2014, 54(2), 230-241. , Available at SSRN: https://ssrn.com/abstract=2352260

Diemo Dietrich (Contact Author)

Newcastle University Business School ( email )

5 Barrack Road
Newcastle-upon-Tyne NE1 7RU, NE1 4SE
United Kingdom

HOME PAGE: http://www.ncl.ac.uk/business-school/staff/profile/diemodietrich.html

Achim Hauck

University of Portsmouth ( email )

Portsmouth Business School
Portsmouth
United Kingdom

HOME PAGE: http://www.port.ac.uk/economics-and-finance/staff/achim-hauck.html

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
450
PlumX Metrics