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Bank capital regulation, loan contracts, and corporate investment

Diemo Dietrich and Achim Hauck ()

The Quarterly Review of Economics and Finance, 2014, vol. 54, issue 2, 230-241

Abstract: This paper studies the link between bank capital regulation, bank loan contracts and the allocation of corporate resources across firms’ different business lines. Credit risk is lower when firms write contracts that oblige them to invest mainly into projects with highly tangible assets. We argue that firms have an incentive to choose a contract with overly safe and thus inefficient investments when intermediation costs are increasing in banks’ capital-to-asset ratio. Imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs.

Keywords: Financial contracting; Corporate investment; Asset tangibility; Bank capital regulation (search for similar items in EconPapers)
Date: 2014
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Working Paper: Bank Lending, Bank Capital Regulation and Efficiency of Corporate Foreign Investment (2007) Downloads
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DOI: 10.1016/j.qref.2013.10.005

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