Implications of Bank Regulation for Loan Supply and Bank Stability: A Dynamic Perspective

European Journal of Finance 2019, 25(16), 1527-1550. DOI:10.1080/1351847X.2019.1614084

Posted: 5 Aug 2019 Last revised: 26 Jan 2020

See all articles by Monika Bucher

Monika Bucher

Deutsche Bundesbank

Diemo Dietrich

Newcastle University Business School

Achim Hauck

University of Portsmouth

Multiple version iconThere are 2 versions of this paper

Date Written: May 9, 2019

Abstract

We show that internal funds play a particular role in the regulation of bank capital, which has not received much attention, yet. A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and its future vulnerability to bankruptcy risks. Using a partial equilibrium model, we study how internal funds affect these intra- and intertemporal links. Moreover, our positive analysis identifies the effects of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of internal funds and thus loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation.

Keywords: bank lending, banking crisis, bank capital regulation, liquidity regulation

JEL Classification: G01, G21, G28, E32

Suggested Citation

Bucher, Monika and Dietrich, Diemo and Hauck, Achim, Implications of Bank Regulation for Loan Supply and Bank Stability: A Dynamic Perspective (May 9, 2019). European Journal of Finance 2019, 25(16), 1527-1550. DOI:10.1080/1351847X.2019.1614084, Available at SSRN: https://ssrn.com/abstract=3429999

Monika Bucher

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Diemo Dietrich (Contact Author)

Newcastle University Business School ( email )

5 Barrack Road
Newcastle-upon-Tyne NE1 7RU, NE1 4SE
United Kingdom

HOME PAGE: http://www.ncl.ac.uk/business-school/staff/profile/diemodietrich.html

Achim Hauck

University of Portsmouth ( email )

Portsmouth Business School
Portsmouth
United Kingdom

HOME PAGE: http://www.port.ac.uk/economics-and-finance/staff/achim-hauck.html

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