Bank Lending, Bank Capital Regulation and Efficiency of Corporate Foreign Investment
Diemo Dietrich and
Achim Hauck ()
No 4/2007, IWH Discussion Papers from Halle Institute for Economic Research (IWH)
In this paper we study interdependencies between corporate foreign investment and the capital structure of banks. By committing to invest predominantly at home, firms can reduce the credit default risk of their lending banks. Therefore, banks can refinance loans to a larger extent through deposits thereby reducing firms' effective financing costs. Firms thus have an incentive to allocate resources inefficiently as they then save on financing costs. We argue that imposing minimum capital adequacy for banks can eliminate this incentive by putting a lower bound on financing costs. However, the Basel II framework is shown to miss this potential.
Keywords: financial contracting; multinational corporations; internal capital markets (search for similar items in EconPapers)
JEL-codes: G21 F23 G28 (search for similar items in EconPapers)
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Journal Article: Bank capital regulation, loan contracts, and corporate investment (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-4-07
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