Title: Bank Capital, Borrower Power, and Loan Rates
Abstract:We test the predictions of several recent theories of how bank capital affects the rates that banks charge their borrowers. Consistent with previous studies, higher bank capital has a negative impact ...We test the predictions of several recent theories of how bank capital affects the rates that banks charge their borrowers. Consistent with previous studies, higher bank capital has a negative impact on loan rates, and this effect is focused on bank-dependent borrowers. Further investigation shows that borrower cash flow is a critical determinant of this relationship: compared to high-capital banks, low-capital banks charge more for bank-dependent borrowers with low cash flow, but offer greater discounts for bank-dependent borrowers with high cash flow. Our results support the bank-fragility theory, which argues that low bank capital generally toughens bank bargaining power, especially vis-a-vis low-cash-flow borrowers, but weakens bank bargaining power vis-a-vis high-cash-flow borrowers. By contrast, our results are not consistent with models where low-capital banks either consume reputational capital or are generally more risk averse than high-capital banks.Read More