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How do credit ratings affect bank lending under capital constraints?

Author

Listed:
  • Stijn Claessens
  • Andy Law
  • Teng Wang

Abstract

Through the lens of credit risk ratings, we investigate how banks determine loan terms under capital constraints. Using a unique and comprehensive supervisory dataset of individual corporate loans in the US, we show that unexpected adjustments to banks' internal rating systems, which only alter how outsiders assess the riskiness of borrowers, trigger changes in loan terms. The effects are asymmetric: downward adjustments to ratings increase spreads by some 40 bps and decrease committed loan sizes and maturities, but upward adjustments lead to much weaker (yet opposite) effects. Importantly, we find effects to be strong for smaller, riskier, and capital constrained banks as well as for borrowers with poorer credit quality and for non-guaranteed loans. Our findings, robust in several ways, highlight the important role of regulatory capital in loan terms.

Suggested Citation

  • Stijn Claessens & Andy Law & Teng Wang, 2018. "How do credit ratings affect bank lending under capital constraints?," BIS Working Papers 747, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:747
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    Cited by:

    1. Hasan, Iftekhar & Kim, Suk-Joong & Politsidis, Panagiotis N. & Wu, Eliza, 2021. "Loan syndication under Basel II: How do firm credit ratings affect the cost of credit?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    2. Skufi, Lorena, 2020. "Financial sector and macroeconomics links in MEAM," MPRA Paper 120481, University Library of Munich, Germany, revised 2020.
    3. Yuan, Hongqi & Zhou, Yiyuan & Zou, Hong, 2022. "Serving multiple ‘masters’: Evidence from the loan decisions of a publicly listed state-owned bank around a massive economic stimulus programme," Journal of Corporate Finance, Elsevier, vol. 72(C).
    4. Couaillier, Cyril & Lo Duca, Marco & Reghezza, Alessio & Rodriguez d’Acri, Costanza, 2022. "Caution: do not cross! Capital buffers and lending in Covid-19 times," Working Paper Series 2644, European Central Bank.
    5. Afik, Zvika & Galil, Koresh, 2025. "Have ratings become more accurate?," Journal of Banking & Finance, Elsevier, vol. 170(C).
    6. Marrenbach, Ludwig, 2024. "Leveraging credit ratings through impression management: An exploratory study of German small and medium-sized family firms," Junior Management Science (JUMS), Junior Management Science e. V., vol. 9(2), pages 1511-1539.

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    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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