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dc.contributor.authorKopecky, Kenneth
dc.contributor.authorVanHoose, David D.
dc.date.accessioned2005-08-13T17:55:46Z
dc.date.available2005-08-13T17:55:46Z
dc.date.copyrightNovember 28, 2004
dc.date.issued2005-08-13T17:55:46Z
dc.identifier.urihttp://hdl.handle.net/2104/325
dc.description.abstractThis 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.format.extent626481 bytes
dc.format.mimetypeapplication/pdf
dc.language.isoen_USen
dc.relation.ispartofseriesBaylorBusiness Economics: Working Papers Seriesen
dc.relation.ispartofseries2005-060-ECOen
dc.subjectBank Loansen
dc.subjectJEL Classification: G28en
dc.titleCapital Regulation, Heterogeneous Monitoring Costs, and Aggregate Loan Qualityen
dc.typeWorking Paperen


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