To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization

40 Pages Posted: 16 Dec 2018 Last revised: 15 May 2019

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Artashes Karapetyan

ESSEC Business School

Sudipto Karmakar

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2019

Abstract

We study the impact of higher capital requirements on banks’ decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA capital exercise, a quasi-natural experiment that required a number of banks to increase their regulatory capital but not others. This experiment makes secured lending more attractive vis-à-vis unsecured lending for the affected banks as secured loans require less regulatory capital. Using a loan-level dataset covering all corporate loans in Portugal, we identify a novel channel of higher capital requirements: relative to the control group, treated banks require loans to be collateralized more often after the shock, but less so for relationship borrowers. This applies in particular for collateral that saves more on regulatory capital.

Keywords: Capital Requirements, Collateral, Relationship Lending, Lending Technology

JEL Classification: G21, G28, G32

Suggested Citation

Degryse, Hans and Karapetyan, Artashes and Karmakar, Sudipto, To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization (February 1, 2019). Bank of England Working Paper No. 778. Available at SSRN: https://ssrn.com/abstract=3290581 or http://dx.doi.org/10.2139/ssrn.3290581

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Artashes Karapetyan

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Sudipto Karmakar

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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