Model-based regulation and firms' access to finance

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Title: Model-based regulation and firms' access to finance
ISBN: 978-952-323-261-7
Author: Tuuli, Saara
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2019
Series number: 4/2019
Year of publication: 2019
Publication date: 15.2.2019
Pages: 49
Subject (yso): pankit; pääoma; sääntely; yritykset; rahoitus; luotot
Keywords: IRBA;
JEL: G21; G28; D25; E51
Other keywords: banks; capital regulation; firm-level data; borrowing constraints; Internal Ratings Based Approach (IRBA); Basel II
Abstract: This paper investigates the impact of the model-based approach to bank capital regulation (i.e. the Internal Ratings Based Approach; IRBA) on firms' access to finance. A difference-in-differences methodology is used given that the IRBA, introduced as part of Basel II, was adopted by different banks in different times. The results suggest that firms indirectly affected by the new regulation via their main bank adopting the IRBA faced a 6-7 percentage point higher probability of facing a deterioration in their access to finance. When the sample is adjusted for the demand for credit, this estimate increases to 12-13 percentage points. The impact is found to come via increases in the cost of credit and to a smaller extent, reductions in the volume or size of loans. Around three-quarters of the effect is attributed to the sensitivity of the IRBA capital requirements to economic conditions, with adopting banks also found to specialize in low-risk lending.

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