How Do Capital Requirements Affect Loan Rates? Evidence From High Volatility Commercial Real Estate

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.

Keywords: Capital Requirements, Basel III, Commercial Real Estate

JEL Classification: G21, G28, G38