Model-Based Regulation and Firms' Access to Finance

49 Pages Posted: 19 Feb 2019

See all articles by Saara Tuuli

Saara Tuuli

University of Helsinki; Nordic Investment Bank

Date Written: February 15, 2019


This paper investigates the impact of the model-based approach to bank capital regulation (i.e. the Internal Ratings Based Approach; IRBA) on firms' access to finance. A difference-in-differences methodology is used given that the IRBA, introduced as part of Basel II, was adopted by different banks in different times. The results suggest that firms indirectly affected by the new regulation via their main bank adopting the IRBA faced a 6-7 percentage point higher probability of facing a deterioration in their access to finance. When the sample is adjusted for the demand for credit, this estimate increases to 12-13 percentage points. The impact is found to come via increases in the cost of credit and to a smaller extent, reductions in the volume or size of loans. Around three-quarters of the effect is attributed to the sensitivity of the IRBA capital requirements to economic conditions, with adopting banks also found to specialize in low-risk lending.

Keywords: banks, capital regulation, firm-level data, borrowing constraints, Internal Ratings Based Approach (IRBA), Basel II

JEL Classification: G21, G28, D25, E51

Suggested Citation

Tuuli, Saara, Model-Based Regulation and Firms' Access to Finance (February 15, 2019). Bank of Finland Research Discussion Paper No. 4/2019, Available at SSRN: or

Saara Tuuli (Contact Author)

University of Helsinki ( email )

University of Helsinki
Helsinki, FIN-00014

Nordic Investment Bank

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