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Bank Capital Regulation, Loan Contracts, and Corporate Investment

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.

Publication metadata

Author(s): Dietrich D, Hauck A

Publication type: Article

Publication status: Published

Journal: Quarterly Review of Economics and Finance

Year: 2014

Volume: 54

Issue: 2

Pages: 230-241

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

Publisher: Elsevier


DOI: 10.1016/j.qref.2013.10.005


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