Bank capital regulation, loan contracts, and corporate investment

Achim Hauck, Diemo Dietrich

Research output: Contribution to journalArticle

2 Citations (Scopus)
21 Downloads (Pure)

Abstract

This paper studies the link between bank capital regulation, bank loan contracts and the allocation of corporate resources across firms’ different business lines. Credit risk is lower when firms write contracts that oblige them to invest mainly into projects with highly tangible assets. We argue that firms have an incentive to choose a contract with overly safe and thus inefficient investments when intermediation costs are increasing in banks’ capital-to-asset ratio. Imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs.
Original languageEnglish
Pages (from-to)230-241
Number of pages12
JournalQuarterly Review of Economics and Finance
Volume54
Issue number2
Early online date16 Oct 2013
DOIs
Publication statusPublished - 1 May 2014

Keywords

  • Financial contracting
  • Corporate investment
  • Asset tangibility
  • Bank capital regulation

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