Bank Capital and the Credit Crunch: The Roles of Risk-Based and Leverage-Based Capital Regulations

Posted: 12 May 2000

See all articles by Diana Hancock

Diana Hancock

Federal Reserve Board - Division of Research and Statistics

James A. Wilcox

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Abstract

We investigated whether in recent years banks have increased their holdings of securities at the expense of their holdings of business loans in response to short-falls of their capital relative to risk-weighted capital standards and relative to a capital standard that made no explicit allowance for credit risk. We estimated that bank credit fell by about $4.50 for each $1 that a bank's capital fell short of the unweighted capital standard. Banks that had less capital than required by the risk-weighted standard appear to have shifted away from assets with low risk weights (securities and single-family mortgages) and to have shifted toward assets with higher risk weights (commercial real estate and commercial and industrial loans). When we included both shortfall variables in a regression, shortfalls relative to the unweighted capital standard significantly affected bank credit, while shortfalls of capital relative to the risk-weighted standard did not. We found no significant effects of capital shortfalls at other, local-competitor banks on bank portfolios. Delinquencies in a given category of a bank's loans generally had significantly negative effects on that bank's holdings of loans in that category. In contrast, banks tended to increase holdings of loans in categories in which local-competitor banks were experiencing higher delinquency rates.

JEL Classification: G21

Suggested Citation

Hancock, Diana and Wilcox, James A., Bank Capital and the Credit Crunch: The Roles of Risk-Based and Leverage-Based Capital Regulations. JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION, Vol 22 No 1, Winter 1994, Available at SSRN: https://ssrn.com/abstract=5436

Diana Hancock (Contact Author)

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3019 (Phone)
202-452-5295 (Fax)

James A. Wilcox

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2455 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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