Speaker: Radek Paluszynski (University of Houston)
Time 10:30-12:00, Friday, August 16, 2019
Venue: 608, College of Social Science, NTU.
Title: CAPITAL REGULATIONS AND THE RISE OF SHADOW BANKING
The Basel III regulations mandated a significant increase in the required level of banks’ own capital holding. Using a new micro-level dataset of corporate credit for the largest firms in South Korea in years 2013-2019, we document a 25% decline in credit from reg- ulated banks, and an increase of similar magnitude from non-bank lenders. We use our data to estimate a strongly negative relationship between corporate lending and mini- mum capital requirements. For identification, we exploit a gradual implementation of the reform in Korea and control for various confounding factors. To understand this find- ing, we build a quantitative model with heterogeneous banks who accumulate equity and invest in risky loans. In addition, heterogeneous firms may endogenously choose to be- come a non-bank lender who does not face regulations. We find that an increase in the capital requirement similar to that of Basel III can justify the decrease in regulated bank lending, as well as the rise in shadow lending of the magnitude documented in our data.