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Capital Regulations and the Management of Credit Commitments during Crisis Times

Author(s): Paul Pelzl, María Teresa Valderrama

Date published: Mar 2020

SUERF Policy Note, Issue No 139
by Paul Pelzl and María Teresa Valderrama


JEL-codes: E51, G01, G21, G28, G32.
Keywords: Capital regulations, bank lending, credit commitments, financial crisis.

Drawdowns on credit commitments by firms reduce a bank’s regulatory capital ratio. Using the Austrian Credit Register, we provide novel evidence that during the 2008-09 financial crisis, capital-constrained banks managed this concern by substantially cutting partly or fully unused credit commitments. Controlling for a bank’s capital position, we also find that greater liquidity problems induced banks to considerably cut such credit commitments during the crisis. These findings suggest that banks actively manage both capital and liquidity risk caused by undrawn credit commitments in periods of financial distress, but thereby reduce liquidity provision to firms exactly when they need it most. In light of our results, the increased capital charge on undrawn credit commitments and the introduction of the Liquidity Coverage Ratio (LCR) in Basel III may help to soften the impact of bank capital and liquidity problems on credit supply and thereby increase future financial stability.
 
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SUERF Policy Note, Issue No 139SUERF Policy Note, Issue No 139

Capital Regulations and the Management of Credit Commitments during Crisis TimesWeb version: Capital Regulations and the Management of Credit Commitments during Crisis Times

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