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Regulation Avoidance in the Banking Industry: The Case of 364 Day Lines of Credit
Author(s) -
Mosebach Michael
Publication year - 2000
Publication title -
journal of international financial management and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.818
H-Index - 37
eISSN - 1467-646X
pISSN - 0954-1314
DOI - 10.1111/1467-646x.00062
Subject(s) - maturity (psychological) , business , balance sheet , credit reference , capital (architecture) , credit history , balance (ability) , financial system , finance , credit risk , biology , psychology , developmental psychology , archaeology , history , neuroscience
The purpose of this case is to offer a demonstration of Kane's regulatory dialectic and to discuss a line of credit that is a result of the interaction between the regulators and the regulated. Banks have been affected by new capital requirements. Calculation of these requirements considers not only on‐balance sheet activities but off‐balance sheet activities. Prior to these requirements, banks issued one year lines of credit for 365 days. These lines of credit have since been replaced with 364 day lines of credit. With maturity less than one year, the percentage of lines of credit considered in the calculations for required capital is reduced from 50% to 20%. Lines of credit are well established financial instruments and there is no reason, other than the changes in regulations, to make banks change the maturity dates by one day.