DP13331 To Ask or Not To Ask? Bank Capital Requirements and Loan Collateralization

Author(s): Hans Degryse, Artashes Karapetyan, Sudipto Karmakar
Publication Date: November 2018
Date Revised: November 2018
Keyword(s): Capital requirements, Collateral, Lending Technology, relationship lending
JEL(s): G21, G28, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13331

We study the impact of higher capital requirements on banks' decisions to grant collateralized rather than uncollateralized loans. We exploit the 2011 EBA capital exercise, a quasi-natural experiment that required a number of banks to increase their regulatory capital but not others. This experiment makes secured lending more attractive vis-à-vis unsecured lending for the affected banks as secured loans require less regulatory capital. Using a loan-level dataset covering all corporate loans in Portugal, we identify a novel channel of higher capital requirements: relative to the control group, treated banks require loans to be collateralized more often after the shock, but less so for relationship borrowers. This applies in particular for collateral that saves more on regulatory capital.