The Impact of the Regulation of Centrally Cleared Credit Risk Transfer and Capital Requirements on Banks’ Lending Discipline
AbstractThis article analyzes the impact of the regulatory design of centrally cleared credit risk transfer and capital requirements on a loan originating bank's lending discipline in the primary loan market. Under Basel III, a bank can transfer credit risk via central clearing at favorable regulatory conditions. Credit risk transfer, however, reduces the lending discipline because it allows the bank to profitably grant and hedge a low quality loan. Stricter capital requirements only mitigate this problem if they are combined with a credit risk retention rule for the loan originator. It is shown how the retention rule, the disclosure requirements on the centrally cleared credit risk transfer market, and the capital requirements for hedged and unhedged loan exposures jointly affect a bank's lending discipline.
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Bibliographic InfoPaper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1321.
Length: 35 pages
Date of creation: May 2013
Date of revision:
Find related papers by JEL classification:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-29 (All new papers)
- NEP-BAN-2013-11-29 (Banking)
- NEP-CBA-2013-11-29 (Central Banking)
- NEP-RMG-2013-11-29 (Risk Management)
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