Anchors in the Storm: the Role of Bank Capital in Corporate Lending
43 Pages Posted: 1 Oct 2017 Last revised: 20 Jan 2018
Date Written: December 30, 2017
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: Suggested Citation