Pro-cyclical capital regulation and lending

Markus Behn, Rainer Haselmann () and Paul Wachtel

No 32/2014, Discussion Papers from Deutsche Bundesbank

Abstract: We use a quasi-experimental research design to examine the effect of model-based capital regulation introduced under the Basel II agreement on the pro-cyclicality of bank lending and firms' access to funds during a recession. In response to an exogenous shock to credit risk in the German economy, loans subject to modelbased, time-varying capital charges were reduced by 3.5 percent more than loans under the traditional approach to capital regulation. The effect is even stronger when we examine aggregate firm borrowing, suggesting that the pro-cyclical effect of model-based capital charges is not offset by substitution to other banks which use the traditional approach.

Keywords: capital regulation; credit crunch; financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Procyclical Capital Regulation and Lending (2016)
Working Paper: Pro-Cyclical Capital Regulation and Lending (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:322014

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