Capital Requirements and Banks’ Leniency

OPEN ARCHIVE

Union Jack
Dannebrog

Capital Requirements and Banks’ Leniency

Show full item record

Title: Capital Requirements and Banks’ Leniency
Author: Dietrich, J. Kimball; Wihlborg, Clas
Abstract: We investigate the effect of changes in capital regulation on the strictness (leniency) of loan terms using a simple model of bank capital requirements and asset quality examinations. Banks offer different levels of "leniency" in the sense of willingness to offer automatic extensions of loans in the presence of temporary payment difficulties of borrowers. Banks offering lenient (less strict) loan terms must have higher initial levels of capital and charge higher loan rates. When capital requirements are increased, both strict and lenient banks hold higher levels of initial capital and they raise loan rates. As capital requirements increase the difference between initial capital levels and between interest rates of strict and lenient banks decrease. Thus, higher capital requirements in recessions tend to reduce the interest rate premium paid for leniency. If a recession is interpreted as an increase in the required return, the interest rate premium paid for leniency is increased in recession at a given level of required capital.
URI: http://hdl.handle.net/10398/6804
Date: 2003-11-21

Creative Commons License This work is licensed under a Creative Commons License.

Files Size Format View
wplefic082003.pdf 355.9Kb PDF View/Open

This item appears in the following Collection(s)

Show full item record