Risk-sensitive Basel Regulations and Firms' Access to Credit: Direct and Indirect Effects

24/10/2018

Risk-sensitive Basel Regulations and Firms' Access to Credit: Direct and Indirect Effects

Balagopal Gopalakrishnan, Joshy Jacob, and Sanket Mohapatra

Working Papers

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This paper examines the impact of risk-sensitive Basel regulations on access to debt and cost of debt for firms with varying characteristics around the world, and investigates how firms cope through reliance on alternative financing sources and adjustments to their capital investments. We find that the implementation of Basel II regulations had a significant impact on the credit availability for firms. The results indicate that debt financing has become more difficult for the lower-rated firms in the post-Basel II period. Firms mitigate the shortage in bank credit induced by the regulation through a combination of higher trade credit, lower payouts, and reduced capital investments. In particular, lower-rated firms substitute reduced bank credit with increased reliance on accounts payables. Such firms also lower their payouts to shareholders, in an effort to maintain their liquidity. We also find that the lower-rated firms experience a significant decline in their capital investment in the post-Basel II period, implying an active response to the deterioration in access to credit. Our key results are robust to alternative estimations that control for changes in credit demand and credit supply shocks, and inclusion of bank-specific variables obtained from loan-level information. The findings of the paper substantially contribute to the understanding of the real effects of risk-sensitive bank capital regulations.

IIMA