Borrowing Beyond Bounds: How Banks Pass on Regulatory Compliance Costs
Abstract:
Regulators monitor concentration risk by requiring banks to report borrowers with loans exceeding 10% of the bank’s capital. We examine whether this reporting requirement has unintended consequences for the lending behavior of European banks. We find that after a reform that lowered the reporting threshold, banks shift more exposures below it and charge large clients higher interest rates than those just under the threshold. This “large exposure penalty” is stronger for smaller, unrated firms in areas with weaker bank competition. Our findings suggest that banks pass the cost of supervisory reporting onto borrowers with limited alternatives.