Advanced Search
MyIDEAS: Login

Did risk-based capital allocate bank credit and cause a credit crunch in the U.S.?

Contents:

Author Info

  • Allen N. Berger
  • Gregory F. Udell

Abstract

This paper examines the reallocation of bank credit from loans to securities in the early 1990s using data on virtually all U.S. banks from 1979 to 1992. The spectacular increase in bank and thrift failures in the 1980s raised concerns about depository institution risk and spurred interest in public policy prescriptions to reduce this risk. One of these pre-scriptions was the Basle Accord on risk-based capital, which mandates that international banks operating in the major industrialized nations hold capital in proportion to their perceived credit risks. Because capital is more expensive to raise than insured deposits, risk-based capital (RBC) may be viewed as a regulatory tax that is higher on assets in categories that are assigned higher risk weights. Therefore, it would be expected that implementation of RBC would encourage substitution out of assets in the 100% risk category, such as commercial loans, and into assets in the 0% risk category, such as Treasury securities. Thus, the allocation of credit away from commercial loans may have caused a "credit crunch," which the authors define as a significant reduction in the supply of credit available to commercial borrowers. Consistent with these expectations, U.S. banks did reduce their commercial loans and increase their holdings of Treasuries in the early 1990s. A number of alternative explanations for this change in bank behavior have been offered. The authors suggest several other hypotheses including the leverage credit crunch hypothesis reflecting banks' interest in reducing their required leverage capital ratio; the loan examination credit crunch hypothesis reflecting the more rigorous examination process which encouraged substitution into safe assets; the voluntary risk retrenchment credit crunch hypothesis reflecting management's voluntary substitution of safer assets to lower the cost of funding and reduce the risk of bankruptcy; and the macro/regional demand-side hypo-thesis reflecting the redu

(This abstract was borrowed from another version of this item.)

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 93-41.

as in new window
Length:
Date of creation: 1993
Date of revision:
Handle: RePEc:fip:fedgfe:93-41

Contact details of provider:
Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
Web page: http://www.federalreserve.gov/
More information through EDIRC

Order Information:
Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

Related research

Keywords: Bank capital ; Bank loans;

Other versions of this item:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:93-41. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.