Capital Regulations and the Management of Credit Commitments during Crisis Times

Drawdowns on credit commitments by firms reduce a bank’s capital buffer. Exploiting Austrian credit register data and the 2008-09 financial crisis as exogenous shock to bank health, we provide novel evidence that capital-constrained banks manage this concern by substantially cutting partly or fully...

Full description

Saved in:
Bibliographic Details
Published in:Discussion paper 2020
Main Authors: Pelzl, Paul, Valderrama, Maria Teresa
Format: Article
Language:English
Subjects:
Capital Regulations
Credit Commitments
Financial Crisis
Online Access:Request full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Drawdowns on credit commitments by firms reduce a bank’s capital buffer. Exploiting Austrian credit register data and the 2008-09 financial crisis as exogenous shock to bank health, we provide novel evidence that capital-constrained banks manage this concern by substantially cutting partly or fully unused credit commitments. Controlling for a bank’s capital position, we further find that also larger liquidity problems induce banks to cut such commitments. These results show that banks manage both capital and liquidity risk posed by undrawn credit commitments in periods of financial distress, but thereby reduce liquidity insurance to firms exactly when they need it most.