The new Capital Accord and banks' lending decisions

The aim of this paper is to provide an empirical evaluation of the possible impact of the new Accord proposals on the lending policies of Italian banks. We compare the interest rate charged to a large set of Italian firms with the cost brought about by the change in the calculation of capital requirements. Since the two variables move together in response to an increase in borrowers' PDs, we conclude that the new regulatory approach to measuring capital adequacy appears consistent with banks' own risk evaluations. This result is supported by a 'stress testing' exercise: the relationship also holds in a distressed economic scenario, which replicates the financial conditions of the Italian corporate sector in the 1993-1994 recession.