To ask or not to ask: bank capital requirements and loan collateralization

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 February 2019

Staff Working Paper No. 778

By Hans Degryse, Artashes Karapetyan and Sudipto Karmakar

We study the impact of higher capital requirements on banks’ decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA capital exercise, a quasi-natural experiment that required a number of banks to increase their regulatory capital but not others. This experiment makes secured lending more attractive vis-à-vis unsecured lending for the affected banks as secured loans require less regulatory capital. Using a loan-level data set covering all corporate loans in Portugal, we identify a novel channel of higher capital requirements: relative to the control group, treated banks require loans to be collateralized more often after the shock, but less so for relationship borrowers. This applies in particular for collateral that saves more on regulatory capital.

PDFTo ask or not to ask: bank capital requirements and loan collateralization

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