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Lookup NU author(s): Dr Diemo DietrichORCiD
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License (CC BY-NC 4.0).
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.
Author(s): Dietrich D, Hauck A
Publication type: Article
Publication status: Published
Journal: Quarterly Review of Economics and Finance
Print publication date: 01/05/2014
Online publication date: 16/10/2013
Acceptance date: 05/10/2013
Date deposited: 26/09/2014
ISSN (print): 1062-9769
ISSN (electronic): 1878-4259
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