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Do Better Capitalized Banks Lend Less? Long-Run Panel Evidence from Germany

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  • Claudia M. Buch
  • Esteban Prieto

Abstract

Insufficient capital buffers of banks have been identified as one main cause for the large systemic effects of the recent financial crisis. Although higher capital is no panacea, it yet features prominently in proposals for regulatory reform. But how do increased capital requirements affect business loans? While there is widespread belief that the real costs of increased bank capital in terms of reduced loans could be substantial, there are good reasons to believe that the negative real sector implications need not be severe. In this paper, we take a long-run perspective by analyzing the link between the capitalization of the banking sector and bank loans using panel cointegration models. We study the evolution of the German economy for the past 60 years. We find no evidence for a negative impact of bank capital on business loans.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3836.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3836

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Keywords: bank capital; business loans; cointegration;

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Cited by:
  1. Anat R. Admati & Peter M. DeMarzo & Martin F. Hellwig & Paul Pfleiderer, 2013. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2013_23, Max Planck Institute for Research on Collective Goods.
  2. Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48, January.
  3. David Llewellyn, 2013. "Fifty Years in the Evolution of Bank Business Models," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.

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