California Accepted Papers Paper:
Assessing Credit Allocation Effects of Imposing Leverage Limits on U.S. Very Large Banks
*Names in bold indicate Presenter
This paper investigates whether the adoption of a new form of capital requirement, the supplementary leverage rule (SLR), imposed on the largest U.S. banks have impacted credit allocation to large firms. I use a treatment effects framework by comparing the origination of new loans by banks subject to the rule against similar unaffected banks, previously and after the rule was announced. I analyze the market for syndicated loans which is representative of the credit relationships between large banks and large firms. The banks affected by the SLR rule are the largest 15 bank holding corporations in the U.S., and the regulation became effective starting in January 2018. The working hypothesis is that banks have shifted their portfolio towards riskier loans due to the leverage rule. This could have induced the disruption of previous borrower-lender relationships, decreasing the supply of credit and increasing the costs of financing to some firms. The paper contributes to the current debate about efficacy and outcomes of post-crisis banking reforms, and more generally to the analysis of financial stability policies. I provide new empirical evidence about a particular form of regulatory intervention which has not been well studied before.
