The Real Effects of Bank Capital Requirements
AbstractWe measure the impact of bank capital requirements on corporate borrowing and expansion. We use French loan-level data and take advantage of the transition from Basel I to Basel II. While under Basel I the capital charge was the same for all firms, under Basel II, it depends in a predictable way on both the bank's model and the firm's risk. We exploit this two-way variation to empirically estimate the sensitivity of bank lending to capital requirement. This rich identification allows us to control for firm-level credit demand shocks and bank-level credit supply shocks. We find very large effects of capital requirements on bank lending: A 1 percentage point decrease in capital requirement leads to an increase in loan size by about 5%. At the firm level, borrowing also responds strongly although a bit less, consistent with some limited between-bank substitutability. Investment and employment also increase strongly. Overall, because the transition to Basel II led to an average reduction by 2 percentage points of capital requirements, we estimate that the new regulation led, in France, to an increase in average loan size by 10%, an increase in aggregate corporate lending by 1.5%, an increase in aggregate investment by 0.5%, and the creation or preservation of 235,000 jobs.
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Bibliographic InfoPaper provided by HEC Paris in its series Les Cahiers de Recherche with number 988.
Length: 34 pages
Date of creation: 04 Jul 2013
Date of revision:
Bank capital ratios; Bank regulation; Credit supply;
Find related papers by JEL classification:
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-BAN-2013-11-09 (Banking)
- NEP-CBA-2013-11-09 (Central Banking)
- NEP-CFN-2013-11-09 (Corporate Finance)
- NEP-EEC-2013-11-09 (European Economics)
- NEP-MAC-2013-11-09 (Macroeconomics)
- NEP-RMG-2013-11-09 (Risk Management)
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- Labonne, Claire & Lecat, Rémy & Avouyi‑Dovi, Sanvi, 2014.
"The housing market: the impact of macroprudential measures in France,"
Economics Papers from University Paris Dauphine
123456789/13289, Paris Dauphine University.
- Avouyi-Dovi, S. & Labonne, C. & Lecat, R., 2014. "The housing market: the impact of macroprudential measures in France," Financial Stability Review, Banque de France, issue 18, pages 195-206, April.
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