Capital Regulation, Heterogeneous Monitoring Costs, and Aggregate Loan Quality

DSpace/Manakin Repository

BEARdocs is currently undergoing a scheduled upgrade. We expect the upgrade to be completed no later than Monday, March 2nd, 2015. During this time you will be able to access existing documents, but will not be able to log in or submit new documents.

Show simple item record Kopecky, Kenneth VanHoose, David D. November 28, 2004
dc.description.abstract This paper develops a banking-sector framework with heterogeneous loan monitoring costs. Banks are exposed to the moral hazard behavior of borrowers and endogenously choose whether to monitor their loans to eliminate this exposure. After analyzing an unregulated banking system, we examine several cases in which regulatory capital requirements bind the notional loan supplies of various subsets of banks. To gauge the impact of capital requirements, we define loan ‘quality’ in terms of either the ratio of monitored to total loans or the ratio of monitoring banks to total bank population. We find that binding capital requirements unambiguously increase the market loan rate and reduce aggregate lending, but, in all but one case, have an ambiguous effect loan ‘quality.’ Equally important, we show that capital requirements create a misallocation of monitoring activity within the banking system. These results suggest that the benefit/cost ratio of capital requirements is not necessarily greater than unity. en
dc.relation.ispartofseries BaylorBusiness Economics: Working Papers Series en
dc.relation.ispartofseries 2005-060-ECO en
dc.subject Bank Loans en
dc.subject JEL Classification: G28 en
dc.title Capital Regulation, Heterogeneous Monitoring Costs, and Aggregate Loan Quality en
dc.type Working Paper en

Files in this item

This item appears in the following Collection(s)

Show simple item record

Search BEARdocs

Advanced Search


My Account