Dietrich, J. Kimball; Wihlborg, Clas(København, 2003)
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Resume:
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.