Finance and Economics Discussion Series (FEDS)

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November 2018

How do Capital Requirements Affect Loan Rates? Evidence from High Volatility Commercial Real Estate

David Glancy and Robert Kurtzman

Abstract:

We study how bank loan rates responded to a 50% increase in capital requirements for a subcategory of construction lending, High Volatility Commercial Real Estate (HVCRE). To identify this effect, we exploit variation in the loan terms determining whether a loan is classified as HVCRE and the time that a treated loan would be subject to the increased capital requirements. We estimate that the HVCRE rule increases loan rates by about 40 basis points for HVCRE loans, indicating that a one percentage point increase in required capital raises loan rates by about 9.5 basis points.
Accessible materials (.zip)

Keywords: Basel III, Capital Requirements, Commercial Real Estate

DOI: https://doi.org/10.17016/FEDS.2018.079

PDF: Full Paper

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Last Update: January 09, 2020