Did Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch" in the United States?

Abstract

This paper examines the reallocation of bank credit from loans to securities in the early 1990s using data on virtually all U.S. banks from 1979 to 1992. The authors investigate implementation of risk-based capital and other regulatory and nonregulatory changes as possible causes of a supply-driven credit crunch. The main empirical implication of these credit crunch hypotheses--that the reallocation of credit would be most associated with low-capital, high-risk banks--generally is not consistent with the data. Much of the reallocation is associated with demand-side factors but it is difficult to differentiate cleanly among these factors. Copyright 1994 by Ohio State University Press.