How Do Credit Ratings Affect Bank Lending Under Capital Constraints?

34 Pages Posted: 30 Oct 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: September 28, 2018

Abstract

Through the lens of credit risk ratings, we investigate how banks determine loan terms under capital constraints. Using a unique and comprehensive supervisory dataset of individual corporate loans in the US, we show that unexpected adjustments to banks' internal rating systems, which only alter how outsiders assess the riskiness of borrowers, trigger changes in loan terms. The effects are asymmetric: downward adjustments to ratings increase spreads by some 40 bps and decrease committed loan sizes and maturities, but upward adjustments lead to much weaker (yet opposite) effects. Importantly, we find effects to be strong for smaller, riskier, and capital constrained banks as well as for borrowers with poorer credit quality and for non-guaranteed loans. Our findings, robust in several ways, highlight the important role of regulatory capital in loan terms.

Keywords: ratings, bank capital, regulation, loan conditions

JEL Classification: G21, G28

Suggested Citation

Claessens, Stijn and Law, Andy and Wang, Teng, How Do Credit Ratings Affect Bank Lending Under Capital Constraints? (September 28, 2018). BIS Working Paper No. 747. Available at SSRN: https://ssrn.com/abstract=3258753

Stijn Claessens (Contact Author)

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

Board of Governors of the Federal Reserve System ( email )

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

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