Scandinavian Working Papers in Economics
Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science
No 2020/12: Capital Regulations and the Management of Credit Commitments during Crisis Times
Paul Pelzl () and Maria Teresa Valderrama ()
Additional contact information
Paul Pelzl: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Maria Teresa Valderrama: Oesterreichische Nationalbank, Postal: Oesterreichische Nationalbank , Postfach 61, 1011 Wien, Austria
Abstract: 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.
Keywords: Capital Regulations; Credit Commitments; Financial Crisis
JEL-codes: E51; G01; G21; G28; G32
71 pages, October 15, 2020
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