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The state-dependent impact of changes in bank capital requirements

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  • Lang, Jan Hannes
  • Menno, Dominik

Abstract

Based on a non-linear structural banking sector model, we show that the impact of changes in bank capital requirements on lending is strongly state-dependent. When banks make profits or maintain voluntary capital buffers, the impact on lending works through a “pricing channel” which is small: 0.1% less loans for a 1pp capital requirement increase. When banks are capital-constrained, the impact on lending works through a “quantity channel” which is large: 10% more loans for a 1pp capital requirement reduction. Our results provide a theoretical justification for building up a positive neutral countercyclical capital buffer in “normal” macro-financial environments.

Suggested Citation

  • Lang, Jan Hannes & Menno, Dominik, 2025. "The state-dependent impact of changes in bank capital requirements," Journal of Banking & Finance, Elsevier, vol. 176(C).
    • Handle: RePEc:eee:jbfina:v:176:y:2025:i:c:s0378426625000597
    DOI: 10.1016/j.jbankfin.2025.107439
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    More about this item

    Keywords

    Bank capital requirements; Loan supply; Dynamic stochastic equilibrium model; Financial accelerator; Global solution methods;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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