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The impact of the IRB approach on the relationship between the cost of credit for public companies and financial market conditions

Raffaele Gallo

No 1290, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper examines whether the regulatory approach adopted by banks to calculate capital requirements has a different impact on the loan rates for public and private companies when financial market conditions change. Using Italian data for the period 2008-18, the analysis documents that the adoption of the internal ratings-based (IRB) approach has led to a significantly greater sensitivity of the loan rates applied to public companies to financial market conditions, proxied by the VSTOXX index. For credit granted by IRB banks, being public is associated with a significant loan cost advantage when the level of financial instability is low. However, when VSTOXX rises, public companies experience a greater increase in loan rates than private firms; the effect is determined mostly by less capitalized IRB banks. In contrast, for credit granted by banks that adopt the standardized approach (SA), public borrowers do not benefit from a significant loan cost advantage compared with private ones, and a change in financial market conditions has a similar impact on loan rates for both types of companies.

Keywords: credit risk regulation; public firm; financial stability; interest rates; bank credit (search for similar items in EconPapers)
JEL-codes: G01 G20 G21 G32 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-ban and nep-cfn
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