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The Real Effects of Bank Capital Requirements

Author

Listed:
  • Henri Fraisse

    (Autorité de Contrôle Prudentiel et de Résolution, Banque de France, 75009 Paris, France;)

  • Mathias Lé

    (Banque de France, 75001 Paris, France;)

  • David Thesmar

    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142; Center for Economic and Policy Research, Washington, District of Columbia 20009)

Abstract

We measure the impact of bank capital requirements on corporate borrowing, investment, and employment using loan-level data. The Basel II regulatory framework makes capital requirements vary across both banks and firms, which allows us to control for time-varying firm-level risk and bank-level credit supply shocks. We find that a 1 percentage point increase in capital requirements reduces lending by 2.3%–4.5%. Firms can attenuate this reduction by substituting borrowing across banks, but only to a limited extent. The resulting reduction in borrowing capacity affects significantly both investment and employment: for firms whose effective capital requirements increase by 1 percentage point, fixed assets are reduced by 1.1%, capital expenditures by 2.7%, and employment by 0.8%.

Suggested Citation

  • Henri Fraisse & Mathias Lé & David Thesmar, 2020. "The Real Effects of Bank Capital Requirements," Management Science, INFORMS, vol. 66(1), pages 5-23, January.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:1:p:5-23
    DOI: 10.1287/mnsc.2018.3222
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    More about this item

    Keywords

    bank capital ratios; bank regulation; credit supply;
    All these keywords.

    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

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