Credit Market Competition and Capital Regulation

in line with the results in Kim et al. (2005), the model shows that also borrowers can impose
discipline on banks by demanding they hold capital as a commitment devise to exert moni-
toring. Finally, an interesting empirical implication of our analysis is that bank monitoring,
and thus capital holdings, are of more value to firms with high agency problems. Firms for
which monitoring has little value should prefer to borrow either from an arm’s length source
of financing, or from a bank with low capital, and thus lower costs. Billett et al. (1995) finds
that lender “identity”, in the sense of the lender’s credit rating, is an important determinant
of the market’s reaction to the announcement of a loan. To the extent that capitalization
improves a lender’s rating and reputation, these results are consistent with the predictions
of our model.

24

<<   24   25   26   27   28   29   30   >>

More intriguing information