Pro-Cyclical Capital Regulation and Lending

By Mark D. Behn, R. Haselmann, P. Wachtel. Social Science Research Network, 2016

233 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/02bd4197a75ed9c07be80fdea1425d0ac1db10f7

Citations in the corpus

• The Limits of Model-based Regulation (2014, unknown): “…potential problems associated with them have been discussed in several papers, for example, Brinkmann and Horvitz (1995), Jones (2000), Daníelsson, Embrechts, Goodhart, Keating, Muennich, Renault, and Shin (2001), Kashyap and Stein (2004), Hellwig (2010), and Behn, Haselmann, and Wachtel (2016).”