Bank lending constraints in the EA and their macroeconomic implications

This section presents stylised scenarios highlighting how low bank profitability, reluctance to issue bank equity and increases in target capital ratios can temporarily constrain bank lending in the current economic context. In connection with this, the article also reviews the main potential and actual sources of increases in minimum capital requirements at euro area level. An increase in bank capital ratios is expected to improve financial stability by lowering the probability and cost of a financial crisis. Beyond this important benefit, the combination of the three factors mentioned has the potential to significantly constrain bank lending during the period of transition to higher capital ratios. According to DSGE model simulations, this could reduce growth and investment levels in the short run. As such, restoring bank profitability, implementing conservative dividend payout policies and promoting equity issuance can have particularly positive macroeconomic implications in the current context.