Anchors in the Storm: the Role of Bank Capital in Corporate Lending

43 Pages Posted: 1 Oct 2017 Last revised: 20 Jan 2018

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Andy Law

Board of Governors of the Federal Reserve System; Yale University, Department of Economics, Students

Teng Wang

Board of Governors of the Federal Reserve System

Date Written: December 30, 2017

Abstract

Banks, in determining their loan conditions given internal and external constraints, typically use models involving ratings. Using unique supervisory data for individual corporate loans in the U.S., we show that exogenous changes in the perceived risk of bank assets due to remappings of banks’ internal rating system trigger adjustments in loan conditions. The effects are also asymmetric: downward remappings increase spreads by some 40 bps and decrease commitments and maturities, but upward remapping lead to much weaker (but opposite) effects. Furthermore, we find the effects are stronger for smaller, riskier, and poorly capitalized banks as well as for borrowers with poorer credit quality and unsecured loans. Our findings highlight the important role of capital in stabilizing a bank’s credit provisioning.

Keywords: Loan Internal Rating, Bank Capital Ratio, Bank Lending

JEL Classification: G20, G21

Suggested Citation

Claessens, Stijn and Law, Andy and Wang, Teng, Anchors in the Storm: the Role of Bank Capital in Corporate Lending (December 30, 2017). Available at SSRN: https://ssrn.com/abstract=3046066

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Andy Law

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Yale University, Department of Economics, Students ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Teng Wang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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