Journal of Finance Vol. 75 No. 6 2020
The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending
open access
Abstract
Government guarantees generate an implicit subsidy for banks. A capital requirement reduces this subsidy, through a simple liability composition effect. However, the guarantees also make a bank undervalue loans that generates surplus in states of the world in which it defaults. Raising the capital requirement makes the bank safer, which alleviates this problem. We refer to this mechanism, which we argue is empirically relevant, as the forced safety effect .
- DOI
- 10.1111/jofi.12958
- Volume
- 75
- Issue
- 6
- Pages
- 3013-3053
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref