Heightened bank capital requirements and bank credit in a crisis : the case of the 2011 EBA Capital Exercise in the euro area

The European Banking Authority (EBA) decided in October 2011 to launch a “Capital Exercise”, which sought to improve the resilience of large European banking groups to the euro area sovereign debt crisis by increasing their required capital ratios. The authors investigate the lending behaviour of euro area banks over the course of this forced recapitalisation program. Their findings are that banks in banking groups that had to increase their capital ratios had, on average, a lower level of lending growth. The results of their investigations provide a useful benchmark for the new European Single Supervisory Mechanism, as the decisions it will have to take may include higher capital requirements and new regulatory capital weights imposed on sovereign debt holdings.