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The Cost of Bank Regulatory Capital

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  • 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," The Review of Financial Studies, Society for Financial Studies, vol. 37(3), pages 685-726.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:3:p:685-726.
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    References listed on IDEAS

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    1. Hale, Galina & Santos, João A.C., 2009. "Do banks price their informational monopoly?," Journal of Financial Economics, Elsevier, vol. 93(2), pages 185-206, August.
    2. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    3. Vitaly M. Bord & João A.C. Santos, 2014. "Banks' Liquidity and the Cost of Liquidity to Corporations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 13-45, February.
    4. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
    5. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, vol. 101(2), pages 297-312, August.
    6. Paligorova, Teodora & Santos, João A.C., 2017. "Monetary policy and bank risk-taking: Evidence from the corporate loan market," Journal of Financial Intermediation, Elsevier, vol. 30(C), pages 35-49.
    7. João A. C. Santos, 2011. "Bank Corporate Loan Pricing Following the Subprime Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1916-1943.
    8. João A. C. Santos & Andrew Winton, 2008. "Bank Loans, Bonds, and Information Monopolies across the Business Cycle," Journal of Finance, American Finance Association, vol. 63(3), pages 1315-1359, June.
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    Cited by:

    1. Kristian S. Blickle & Quirin Fleckenstein & Sebastian Hillenbrand & Anthony Saunders, 2020. "The Myth of the Lead Arranger’s Share," Staff Reports 922, Federal Reserve Bank of New York.
    2. Chodorow-Reich, Gabriel & Darmouni, Olivier & Luck, Stephan & Plosser, Matthew, 2022. "Bank liquidity provision across the firm size distribution," Journal of Financial Economics, Elsevier, vol. 144(3), pages 908-932.
    3. David Glancy & Robert Kurtzman, 2022. "How Do Capital Requirements Affect Loan Rates? Evidence from High Volatility Commercial Real Estate," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(1), pages 88-127.
    4. Richard K. Crump & João A. C. Santos, 2018. "Review of New York Fed studies on the effects of post-crisis banking reforms," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 71-90.

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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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