Credit Creation: Reconciling Legal and Regulatory Incentives
23 Pages Posted: 14 Nov 2017 Last revised: 7 Apr 2020
As international organizations adopt new legal standards to promote access to credit through the modernization of national secured transactions law, the lack of coordination with regulatory standards for banking institutions thwarts the effectiveness of these efforts. In recognizing the relevance of the problem, international organisations are considering how to coordinate secured transactions law reforms with a thorough and full implementation of the Basel Accords. Although these efforts are commendable, coordination between international standards promoting secured transactions law and defining capital adequacy standards should be addressed at their inception.
To advance this argument, the key functions of secured transactions law and capital requirements are isolated and a holistic understanding of the legal and regulatory rules governing the creation of credit is presented. The Article steers away from the idea that banks are mere intermediaries and offers a fresh perspective on the role of regulatory capital in controlling credit creation, by binding the extension of loans to an amount of bank's own funds that is proportionate to the level of risk acquired. Within this context, the incentives created by secured transactions law and capital requirements are examined by comparing the capital charges for different credit protections, including credit derivatives and commercial loans to small business. The implementation of a reformed secured transactions law and the limited ability of security interests in movable assets to reduce regulatory capital under the Basel Accords might stimulate the creation of credit outside the banking system. To control this phenomenon, the Article shows that it is essential to reconcile the incentive structures created by international legal and regulatory standards.
Keywords: Credit Creation, Access to Credit, Secured Transactions, Capital Requirements, Basel, Capital Adequacy, Secured Transactions Law Reforms, UNCITRAL, Credit Risk, Collateral, Security in Personal Property, Risk-Weighted Assets, Regulatory Capital, Credit Default Swap
JEL Classification: K10, K11, K22, K23, G21, G23, G28, E51, P14, P16, O57
Suggested Citation: Suggested Citation