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Regulatory capital, market capital and risk taking in international bank lending

Stefan Avdjiev () and Jose Maria Serena Garralda

No 912, BIS Working Papers from Bank for International Settlements

Abstract: We investigate the links among US monetary policy, bank capital, and risk taking in international bank lending. Using syndicated loan data, we find that low US interest rates spur the origination of risky dollar-denominated international loans through two distinct mechanisms. First, consistent with the existence of a regulatory capital channel, banks with higher levels of regulatory capital originate riskier loans when interest rates decline. Second, banks with low levels of market capital have a higher propensity to extend riskier loans in response to falling interest rates. This finding implies the existence of a market capital channel, which operates in the opposite direction to the regulatory capital channel.

Keywords: interest rates; bank capital; risk taking; international leveraged loans (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2020-12
New Economics Papers: this item is included in nep-ban and nep-cba
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