The Transmission of Bank Funding to Corporate Loans: Deleveraging in Germany

Abstract

Healthy banks are crucially important for smooth lending. Correspondingly, bank regulations including Basel III intend to create a strong financial sector. However, the higher capital requirements may also worsen the access to finance especially during the transition period. Using data on firm-bank relationships in Germany between 2005 and 2007, we show that the debt ratio of banks is related to the bank loan risk. In order to assess the potential effect of tighter capital requirements due to regulatory changes, we analyze industry specific responses of loan conditions to bank debt levels. Our findings imply that manufacturing, and to a lesser extent wholesale and retail trade, will potentially face a more restricted access to bank loans after the tightening of capital requirements.