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Publication year
The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending
Resource type
Authors/contributors
- Bahaj, Saleem (Author)
- Malherbe, Frederic (Author)
Title
The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending
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.
Publication
The Journal of Finance
Volume
75
Issue
6
Pages
3013-3053
Date
2020
Citation
Bahaj, S., & Malherbe, F. (2020). The Forced Safety Effect: How Higher Capital Requirements Can Increase Bank Lending. The Journal of Finance, 75, 3013–3053.
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