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The Cost of Bank Regulatory Capital

Author

Listed:
  • Matthew C Plosser
  • João A C Santos

Abstract

Basel I introduced capital requirements for undrawn commitments, but only for revolvers with an original maturity greater than one year. We use this regulatory discontinuity to estimate the impact of capital regulation on the cost and composition of credit. Following Basel I, short-term commitment fees declined relative to long-term commitments and issuance of short-term facilities increased. Our results highlight the sensitivity of credit provision to capital regulation, particularly for banks with less capital. We are able to infer that low-capital banks are willing to forego twice as much income from fees to reduce required regulatory capital by a dollar.

Suggested Citation

  • Matthew C Plosser & João A C Santos, 2024. "The Cost of Bank Regulatory Capital," Review of Finance, European Finance Association, vol. 37(3), pages 685-726.
    • Handle: RePEc:oup:revfin:v:37:y:2024:i:3:p:685-726.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad077
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    More about this item

    Keywords

    G21; G28;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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