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Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment

Author Info

Listed author(s):
  • Reint Gropp

    (Halle Institute for Economic Research)

  • Thomas C. Mosk

    (Goethe University Frankfurt)

  • Steven Ongena

    (University of Zurich and Swiss Finance Institute)

  • Carlo Wix

    (Goethe University Frankfurt)

Abstract

We study the impact of higher capital requirements on banks' balance sheets and its transmission to the real economy. The 2011 EBA capital exercise provides an almost ideal quasi-natural experiment, which allows us to identify the effect of higher capital requirements using a difference-in-differences matching estimator. We find that treated banks increase their capital ratios not by raising their levels of equity, but by reducing their credit supply. We also show that this reduction in credit supply results in lower firm-, investment-, and sales growth for firms which obtain a larger share of their bank credit from the treated banks.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 16-70.

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Length: 61 pages
Date of creation: Nov 2016
Handle: RePEc:chf:rpseri:rp1670
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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Keywords: bank capital requirements; bank lending; real economy;

Other versions of this item:

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
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • 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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Cited by:

  1. Acharya, Viral V & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2017. "Whatever it takes: The Real Effects of Unconventional Monetary Policy," CEPR Discussion Papers 12005, C.E.P.R. Discussion Papers.
  2. Ambrocio, Gene & Jokivuolle, Esa, 2017. "Should bank capital requirements be less risk-sensitive because of credit constraints?," Research Discussion Papers 10/2017, Bank of Finland.
  3. Acharya, Viral & Eisert, Tim & Eufinger, Christian & Hirsch, Christian, 2017. "Whatever it takes: The real effects of unconventional monetary policy," SAFE Working Paper Series 152, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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