Basel IV and the Cost of Debt for Rated and Unrated Firms: Evidence from the EU/EEA

Sammanfattning

In January 2025 the European Union implemented Basel IV through Regulation CRR3, introducing a new output floor that constrains how banks calculate capital requirements on corporate loans. A key feature of the regulation is that it treats rated and unrated companies asymmetrically. Unrated borrowers are assigned a flat 100% risk weight under the standardised approach, whereas investment-grade rated firms receive lower weights. The reform therefore raises the relative cost for banks of lending to unrated firms, and a natural question is whether this is being passed on to those borrowers in the form of higher interest rates. We address this question using quarterly firm-level data on large listed non-financial firms across the EU and EEA, applying a difference-in-differences framework with firm and time fixed effects, and examining how the effect varies with firm size and bank-debt reliance. Unrated firms appear to have experienced a larger increase in borrowing costs than rated firms after the regulation came into force, and the post-period cost increase is concentrated among firms that depend on bank financing. The specification does not separately identify whether this concentration reflects a stronger Basel IV transmission for unrated bank-dependent firms or a more general tightening of bank lending conditions for bank-reliant borrowers. A placebo test further suggests that much of the overall differential predates the regulation and reflects macroeconomic conditions affecting the two groups asymmetrically during the period. We therefore present the findings as evidence consistent with the regulation's predicted impact rather than a definitive measurement of it.