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Bank Capital and the Credit Crunch: The Roles of Risk‐Weighted and Unweighted Capital Regulations


  • Diana Hancock
  • James A. Wilcox


We investigated whether in recent years banks have increased their holdings of securities at the expense of their holdings of business loans in response to shortfalls of their capital relative to risk‐weighted capital standards and relative to a capital standard that made no explicit allowance for credit risk. We estimated that bank credit fell by about $4.50 for each $1 that a bank's capital fell short of the unweighted capital standard. Banks that had less capital than required by the risk‐weighted standard appear to have shifted away from assets with low risk weights (securities and single‐family mortgages) and to have shifted toward assets with higher risk weights (commercial real estate and commercial and industrial loans). When we included both shortfall variables in a regression, shortfalls relative to the unweighted capital standard significantly affected bank credit, while shortfalls of capital relative to the risk‐weighted standard did not. We found no significant effects of capital shortfalls at other, local‐competitor banks on bank portfolios. Delinquencies in a given category of a bank's loans generally had significantly negative effects on that bank's holdings of loans in that category. In contrast, banks tended to increase holdings of loans in categories in which local‐competitor banks were experiencing higher delinquency rates.

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  • Diana Hancock & James A. Wilcox, 1994. "Bank Capital and the Credit Crunch: The Roles of Risk‐Weighted and Unweighted Capital Regulations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 59-94, March.
  • Handle: RePEc:bla:reesec:v:22:y:1994:i:1:p:59-94
    DOI: 10.1111/1540-6229.00626

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    References listed on IDEAS

    1. James T. Fergus & John L. Goodman, 1993. "The 1989-92 credit crunch for real estate. (summary of staff study)," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 676-677.
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